ECONOMICS HANDBOOK SERIES SEYMOUR E. HARRIS, Eno Wiliam 4 of Hamar Unie. Abba P. Lerner Profesor of Eeonomiee oorevet Coleg, Chiage McGRAW-HILL BOOK COMPANY, INC. 1951pi hy he ca a, Cry, He i ‘y'ot te rp oan tara person te pao ‘To Harold J, Laski and Ludwig von Mises, nd the millions of lovers of freedom in between who are addicted to baiting “capitalism” or “soci tolerate “amici ‘orto fight fll employment policies ax “sox bbut will focus their elforts om practical measures for enlarging human freedom and dignity. 620598Preface WHENEVER I mentioned, while working on this book, that I ‘was writing on the economics of employment, the frst question, three times out of four, was "Did you say the economics of un employment?” oF “Do you mean the economics of full employ: tment?” Nevertheles, the title of the book is exacdy as it appears ‘on the tte page. “The refwsl of my fiends to believe chat they had heard aright | is, T think, significant of just dhe kind of auitude that cis book hopes in a slight measure to correct Iwas expected o writea book devoted to attacking the evil of unemployment orto write a book indicating how one could achieve the desirable state of full em ployment I think I have done both of dhe things, but nether fan be done property if primary attention is ditected at what we vant to avoid or at what we want t achieve, Primary atention| ‘ust be directed at understanding and explaining the way things ‘work, Understanding comes frst. Only when we understand the nature of the machinery that determines any level of employment fan we hope to be able to avoid what we do not lke and achieve ‘what we do like, The primary concern of this book is, therfore, to provide an understanding of what makes employment high or low. T think T have done this in nontechnical language 30 that any intelligent person who is willing to pay a lite attention can tundertand it. No previous study of economics is necessary. “To make sire ofthis, asked some of my friends and colleagues ‘who were completely innocent of economics, and even shamefully lacking in interest in economic and social affirs, to read the ‘manuscript chapter by chapter. I was of course most gratified when they declared they could understand aloft and even found it interesting.In doing allthis I have not found it necessary t leave out any part of the heart of the argument. Many alleged popularization, dificult subjects fail because they leave aut what they promise to simplify. Such a procedure leaves unsatisfied the readers hunger for understanding and adds to this injury the insu of inplying that he is really noe up to understanding the eue explanation of the matter. This book does I think, go tothe bottom of things. Although itis writen so that the nonecanomist can follow it it can be read with profit by the student of economics or by the teacher of economies or even by the advanced resatch worker in economics. But those trained in economics wll have the additional sport of looking out for and recognizing many old technical con ‘cepts disguised by the only too unfamiliar garb of plain English. In site of all effors some pars of the book are a lite harder to read than others. There ate seven parts, Part 1 indicates the nature ofthe problem to which the book is devoted, and the frst chapter isa kind of preview ofthe thesis of the whole book, Pat Il is probably the most dificult. Geometrical igures and diagrams are used here forthe convenience of those who find them helpful, bur these have been imprisoned in the appendixes to the various chapters so that those who are frightened rather than helped by them can safely ignore their existence. In the text of these chapters there are some lines of what looks like algebra or leven mathematics, The reader is hereby assured that anyone can follow these who can add, subtract, multiply, and divide small numbers and who realizes that a letter (like C, which indicates consumption) can also stand for a number (ike the number of dollars spent on consumption in some period). Those who are still frightened by such algebra can omit it without losing the thread ofthe argument, because tether only to make clearer, by this kind of repetition, what has already been said in an Eng- lish which, while far from faney is unavoidably cumbersome, It is even possible to skip chee chapters (4 through 7) altogether ‘without running into serious dificutice in the rest of the book Readers who ship Chapters 4 through 7 would be wise to skip Capter 17 to, No one should skip Chapter 8 on Funcom inane. " rr Ht dal wth dhe resstancs that preven the iment application by society of we lution made clear in Pare LI i spelen to anor the ineviable reponse dat the solon a fot tone an cero we won ve Pt practice gage Ie sema to be neyo rend slit everyone that theuman rc not noted fo he pomp with which 2c ‘Shalyto adopt renonable metho of desing wih is Pfc gpsinc some of the problems tht would fice a socey wah wold adopt pole for maintaining tatsictory employ ‘Mon and inctes some ways of going abou sling then This i portant both to combat te Aen that ache fll employ senPcnld save all problems and to counter the objection to tlomentpaies on te ound tat they would no sae problems. Tt Vig de more dep ito the ue raed in Par I and begin with Choper 17 on Saving and the Maller ich ‘tence wo tichon Chaps 4 tough 7 dn i shuld ot be eri ae hate been hipped The et of Part Vi, boweet tox particulary dit. VI bring in ncnaional apes which up this point sows boon debra ail el oot he iter of simpy. at VIL consis of only one chapter nd is primaiy devoted tothe hse tt whe ti ttre that ua suit) acs ‘Pulp to adopt resonable polit won as they ae den isnt it equally alse to rush tothe oppste view th say il meer do that whic rewonable- Although society Kee yy t neers de lee, haters oom Sr 2 pede opin, ‘Ta del indbed to Dorey Welker othe gl Depart snat of Ronevet College fr tang grea ai in reading the trong and eng tin dtl, Any rening lack ofcaer ae aa ey eee wires ugar ate Bn inate oem Tata oon ate ‘Auea P. Leese February, 151 Contents Preface vit Editors Introduction aii PART 1: THE PROBLEM 1. THE ECONOMIC STEERING WHEEL ox Tue Srony oF Tue Prorts's New Corus 3 2, THE MEANING OF FULL EMPLOYMENT n ‘THE IMPORTANCE OF FULL EMPLOYMENT . 1 PART Il: THE SOLUTION 4, EMPLOYMENT AND SPENDING a 5, SPENDING, CONSUMPTION, AND INCOME | 61 6. INVESTMENT 7. INTEREST. 8, FUNCTIONAL FINANCE PART Il: THE RESISTANCES 9. THE UPSIDE-DOWN ECONOMY ox Torse-Tuxvy Boowonncs rr 10, RESISTANCE BY CAPITALISTS BL I, RESISTANCE BY ANTICAPITALISTS 1 12, OPHER RESISTANCES m \D INFLATION PART IV: FULL EMPLOYMENT 4i 13, HIGH FULL EMPLOYMENT AND LOW FULL EMPLOYMENT. 191 1M, A WAGE POLIGY FOR FULL EMPLOYMENT 200 #15, SOME CLARIFICATIONS OF THE WAGE POL- Icy 10, WAGE POLIGY-EFFECTS AND PROBLEMS PART V: A CLOSER VIEW OF FUNCTIONAL FINANCE 17, 18 SAVING GOOD OR BAD? ox SaviNe ano THE ‘Motrin 18, THE NATIONAL DEBT 19. FUNCTIONAL FINANCE AND SOCIALISM 20. THE BUSINESS CYCLE PART VI: INTERNATIONAL ASPECTS 21, INTERNATIONAL TRADE AND CAPITAL MOVEMENTS 22. INTERNATIONAL CURRENGY on. Sevaventat, Inreesattonatisi PART VII: CONCLUSION 28, ECONOMICS, POLITICS, AND ADMINISTRA. ‘TION Index 220 22 5 270 29 307 on 2 m 37 Editor’s Introduction FOR YEARS many teaches of economics and other professional cconomists have fele the need of a series of books on economic subjeets which isnot filled by the usual textbook or by the highly technical treats, This present series, published under the general tide, the Economics Handbook Series, was planned with these needs in ‘mind. Designed fist of all for student, the volumes are wseful in the evergrowing field of adult education and also are of interest, to the informed general reader ‘The volumes are not long-—they give the essentials of the sub jt matter within the limits of few lundred pages; they present 4 disillate of accepted theory and practice, without the detailed Approach of the technical tents, Each volume isa unit standing ‘The audhows ate scholars, each writing on an economic subject (of which he is am authority. In this series the author’ first tsk ‘was not to make important contributions to knowledge-although many of them do-but so to present his subject matter that his work a scholar will carry its maximum influence outside as well, 1 inside the classroom. The time has come to redress the balance between the energie spent on the creation of new ideas and on their disernnation, Economic ideas are unproductive if they do rot spread beyond the world of scholars. Popularzers without technical competence, unqualified textbook writes, and some- times even charlatans control too lange a part of the market for economic idea, In the classroom the Economics Handbook Series will serve, 1 i hoped, a brief surveys in onesemester courses, as supple-mentary reading in introductory courts, and in other courses in Which the subject related Profesior Abba P. Lemer’s volume on employment is luc, elementaty acount of Keynesian economics, The editor knows of ‘no more skillfl presentation of Keynesian economics for the student or informed layman. The author deals with the compo. pens of income, consumption, and investment and with their re Tationships; the determinants of income and notable, the vate of Inerest, and the marginal efficiency of capital; the relation of and the money and the rate of interest, ofthe latter and savin imernational aspects of Keynesian economics, ‘The objective ofthe Handbook Series ea clear presentation of available material. But Dr. Lerner cannot write a book of a few hundred pages without making important contuibutions. ‘The treatment of the multiplier in proces analysis, of low- and high level full employment, the conflicts of private and socal interests with attendant danger to stabilization objectives, the handling of Say’ law-—in these and other areas Lemer shows much originality, ‘One cannot but be impresed by the authors resluteness in re fusing the easy road to expediency. ‘The arrangement of Dr. Lerner’s book is eminently practical, Aware that many readers are averse to graphic. presentation, Lemer has not encumbered the text with chars, Though these diagrams are included and will help the average student, the ‘material i presented in a manner to allow omision by those who prefer the literary exposition, Profewor Lerner has had a distinguished career at student, teacher, and writer. He ranks in the top echelon of economic theorists and yet can present dificult idea in simple language. [As a student at the London School of Economics, in the years 1990 to 1982, he virualy comered the prize marke. He remained there a a research fellow and lecturer, Later he migrated to the United States, teaching successively at Columbia University, the University of Virginia, University of Kansas City, Amberst Col lege, the New School of Soca! Research, and Roosevelt College vahere fe is now Profesor of Economics, TLerne's bescknown waiting is his volume The Bconomies of Gontrol. Greatly influenced by Lord Keynes, Lemer has made humerous contributions to Keynesian economics, and particularly 4 large proportion of about 100 articles were devoted tothe clari- fication and advancement of the new economies. In fat, I can attest at fit hand the importance of Lerner’s work on the subject, for when in the course of other editorial duties, £2, launching the volume The New Eeonomics, 1 combed the available pub lished material, Lemer's articles on this subject were most re. warding SevsiooR E, HAKsisPart I The ProblemCHAPTER 1 The Economic Steering Wheel or The Story of the People’s New Clothes* OUR ECONOMIC system is Frequently put to shame in being displayed before an imaginary visitor fom a strange planet, 1 is time to revert the procedure, Imagine yourself instead in a Buck ‘Rogers interplanetary adventure, ooking at a highway in a City ‘of Tomorrve The highvsay is wide and suaight, and its edges are turned up 40 tht itis alos imposible fora car to run of the road, What appeats to bea runaway aris speding along the roud and veering of to one side. As it approaches the rising edge of the highway, its front wheels ate turned so that it gets back onto the road gid goes off a an angle, making for the other side, where the wheels are turned again, This happens many times, the ar siguagging but keeping on the highway until i is out of sight. ‘You are wondering how long it wil take for io crash, when an other car appears which Behaves in the same fashion. When it fomes nest You it sops witha jerk. A door is opened, and an oc- ‘upant asks whether you would like a 1t. You look into the ear tnd before you can control yourself you ery out, "Why! ‘There's no scering whee" “Of course vee have no steeing wheel!” says one of the aoc pines rather crosly, “Just think how it would cramp the front feat, Ie is wore than an old-fashioned gearshift lever and it is dangerous. Suppose we had a steering wheel and somebody held on tot when we reached a eurbt He would prevent the automate turning of the wheel, and the ear would suzely be overturned! ‘And besides, we believe in democracy and cannot give anyone the This date repeduesd (vith minor changes) (tom The Unies Review (Uaivesiy of Kans Gly, Ma) Janey 1M4 ECONOMICS OF EMPLOYMENT ‘extreme authority of life and death overall the occupants of the cat. That would be dictatorship.” “Down with dictatorship!" chorus the other occupants of the “IE you are worried about the way the eat goes ftom side to side," continues the first speaker, “forget it! We have wonderful brakes so that collisions are prevented nine times out of ten. On ‘our eter road the curb is 50 elective that one can travel hun: reds of miles without going of the rad once, We have a very ficient sate of carving survivors of wrecks to neatby hospitals and for rapidly sweeping the remnants from the road to deposit them on nearby fields as a reminder to man of the inevitability of death.” You look around to see the piles of wrecks and burned-out sutomobile as the man in the car continues, “Impresive, isn't it? But things are going to improve. See those men marking and photographing the tracks of the car that preceded us? They are soing to uke those pictures into their laboratories and pictures fof our tacks, too, to analyze the cjliealcharactetstics of the curves, their degree of regularity, the average stance from twin ‘o turn, the amplitude of the swings, and so on, When they have ‘come to an agreement on ther true nature we may know whether something can be done about it. At present they are disputing ‘whether this cyclical movement is due tothe typeof road surface {rt its shape or whether it is due to the length ofthe cat or the ind of rubber in the tires or t the weather. Some of them think {ha it will be impossible to avoid having cyeles unless we go back to the horse and buggy, but we ean’ do that because we believe in Progress, Well, want a ride?" ‘The dilemma berween saving your skin nd humoring the lunte ties is resolved by your awakening from the nightmare, and you fecl glad thatthe inhabeants of your own planet area litle more ‘eaponable, But are they as reasonable about other things as they ate about the desirability of steering their automobiles? Do they ‘ot behave exactly like the men in the nightmare when it comes ‘Tue RooNoMIe STEERING WHEEL 5 jon to infation Wide and uncontrolled are? Through thelr failure to steer away from tnemployment and idle factories are they not just as uilty ‘of public injury and insecurity as the mad motorisis of Mars? rat in be eyeing te SS i aremdng pole of wala cy jth, Be ee eee a Want only ae neces snc ona ans a nee ease ‘omicble empoypent of sowurs tnd on the te hand ea cee ere eee ee ers ee emma scan whe or amon, yr hs teen ntl ee ies ae eae a ee ane eer eae eae Serre eee ee eee ee pple oa ee eee eee ea ae eee ee ee ey mance ne oe eee See are wie nieeas nee cpeniyrae how terie ae eee te resort ben sre ar sos ad< 6 ECONOMIES OF EMPLOYMENT the manufacturers and there wil result @ reduction in output {and in the number of workers employed in making the goods) A reduction in the rate of spending is thus follow, after this adjustment, bya smaller supply of goods to be purchased, and if the price was lowered in the Sr place it will rise again to the normal level when the supply has been reduced in response to the reduction in demand, "The same ching happens in reverse when there isan inerease in| demand. The shopkeeper’ socks ate reduced below normal and the may take advantage of the increase in demand to raise the price. Buc whether he raises the price oF not he will increase his orders to the wholesaler and the manufacturers There will then be an increas in the amount of goods produced (and in the nus ber of people employed in making them). After this adjustment there willbe a greater supply of goods corresponding tothe greater demand for them, and ifthe price was raised when the demand fst increaed, it will fll again tothe normal level whe the sup- ply has caught up with the demand. The important effec of an in rcase oF ofa decrease in peng ESHA, Terlore, to SEF decrease tie supply. The effect on prices i nly teipo> yy. But if there are no unemployed reiources stailable when spending increase, it is impossible for employment or output to increase. Prices then must be raised and they do not fall back again to normal. They stay higher. ‘The increased spending can not be absorbed by an increase in the supply of goods. I then shows isl in higher prices fr dhe same supply of goods [Nor is this the end of the sory. Although the manufacturer cannot increase output where there sre no unemployed resources available, the increased orders at higher prices induce manulac turers to fry to increase their output wo take advantage of the wn ‘sual high profits. In so doing they ty to get men and inaterials away from each other by offering higher wages and prices (or merely agreeing to demands for higher wages and prices). This ‘THE ECONOMIC STEERING WHEEL. 7 raises the money incomes of labor and of the owners of materials tnd results ina Further increase in spending, Increased spending Increases incomes, and increased incomes increase spending, and so the process becomes curnulative, with prices vsing (and the value of money falling) faster and Taster. IF this process is per- rmited to continue by a monetary authority which provides the creasing amount of money that i needed a prices rite, we have an inflation. Inflation disorganizes the economy, works great hard Ship on persons whose money incomes are fixed or only slowly djwstable, and ruins persons whose savings are cautiously tied to the depreciating money The sim of any reasonable regulation of the level of eco nomic activity (which we may cll “employment” for short) must be to arrange for the rate of spending to be neither too small (which would exuse unemployment) nor to great (which would ‘cause infation). A saisfaccory level (or range) of employment must be chosen, and the total rate of spending must be raised ‘when employment i too low and curtailed when employment rises too high. ‘There are three rules governing the economic steering wheel If the rte of spending happens to satisy this exterion, em: ployment is adequate and there is no need for any special meae- tres IF chere is not suliient spending. so that employment is too love, then the dlference can be made up by the government. “The government can spend money directly om public works of indvectly by reducing taxes, thus permitting the taxpayers to ine ‘crease ther spending, or by paying out more to people who would he only too glad to spend it, such as pensioners or people om re: lik. I there is too much spending, so that there are sighs of the beginnings of inflation, the government can correct this either lively, by reducing its own spending, or indirectly, by collecting more in taxes and thus leaving les forthe taxpayers to spend This gives us the fist rule for the regulation of employment:8 RooNOsICS OF EMPLOYMENT 1, The government shall maintain at all eimes a res sonable level of tal spending in the economy. there fs not enough spending, 4 that there is excessive une ployment, che government shal increase total spending by lowering taxes a by increasing its own expenditures fot both, Tt there is too much spending so that dhere i ination, the government shall reduce total spending, by cutting its own expenditures or by increasing taxes or both. ‘Mast ofthe time our present economy seems to suiller from too tite rather chan from too much spending, so that to eoreet this ispostion ie would be necesary for the government on the Whole to spend more or to decrease its tax revenues oF both, Where is the money to come from? "The simplest answer ix “from the printing pres.” After giving this answer itis usually necessry 10 wait for the Tistene's eye ‘brows eo fallback a little. This movement can be helped by point ing out four things: (I) an increase in the amount of money is rot identical with inflation; 2) an increse in the amount of rnoney in existence is of no importance forthe economy unless it Teas to an increase in spending by somebody (8) an increase in spending is just what is needed to bring about an increase in em ployment; and (4) as long asi is possible forthe supply of goods fo increase along with the increas in spending, there will be no (permanent) increase in prices. “This does not mean that the government would have to Keep on pring more new money forever week by week and year by feat wo maintain prosperity, AS the stock of money increased, it ‘Would in various ways lead to-an crease in spending by private Individuals and corporations. This would reduce the gap in spend: ing that has to be made up by the government. When there is much money in existence that the rate of private spending is enough to provide a satistacory level of employment, the gov ‘ernment will not have to spend any more thm i raises in taxes fnd the printing press can be stopped THE ECONOMIC STEERING WHEEL ° "Thus an adjustment ofthe stock of money can, through isin fyence on the rate of spending, be the quilibrating facor which leeps employinent at a reasonable level. Nevertheles, it might tot be considered desirable to veach this particular equilibrium. Such a policy might perhaps be considered to ental overinvest ‘ment-too lage portion of the resources of society devoted 10 in ‘vstment forthe Future and too litle left to provide for curtent| consumption I the sock of money increases, the members of society will find themselves holding larger and. larger amounts of money {gince the money that is i existence or “in irculation” is always hel by somebody). “They will consider it wasteful to keep sich increasing quant tics oftheir wealth in the form of idle money, making no profit and earning no interes. They will therefore attempt to make sone profit by lending it out at interet or by buying interest ielding forins of wealth, such a securities, with the idle money. ‘The increased avalability of money for borrowers directly lowers the rate of interest that they have t0 pay. The attempt to buy more securities, conaituting an increase in demand for securities in relation to their supply, raises the price of securities. Since the fue of securities by busines fms or by the government is 2 ‘method by which busines frm or the government borrow money, the higher price means that more money can be borrowed for the ‘same interest payments oF thatthe same amount of money can be borrowed for smaller interest payments. This is nothing but another aspect ofthe reduction ofthe rate of interest. In this way bby more director by les direct method an increase in We aiNOURE ‘tnaney Fence Tt thie loeer rate of interest it becomes worthwhile to borrow money to undertake investments in new productive equipment and the like even if they do not yield very much, As the amount ‘of money keeps on increasing ad the rate of interest keps on fll: jing, marginal investments with very low yields, which were not worth making before, now become worth while. Investment will10 RCONOMICS OF EMPLOYMENT thus keep on increasing. A sitntion might be reached in which this produces enough spending to prevent depression, But the iovernment might feel thatthe resources absorbed by these not ‘ery elective marginal investments for rasing productivity in the future could be put to much beter use for the Benefit of the present generation. It might chink it better to bring about the e- fquired increase in spending by, say, providing children’s al lowance, But the government cannot undertake the children’s allowances ‘on top of the marginal investments because there would then he foo much spending-there would be inflation. ‘The marginal investments must therefore be stopped ifthe children’ allowances ate to come into effect without causing inflation. ‘The mary investments would be stopped ifthe rate of interest were to stay high enough to prevent them from being profitable. But the spending of money on the children’s allowances out of deficits [Keep on increasing the stack of money and this keeps on pushing down the rate of interest Somehow the government must prevent the rate of imetet from being pushed down by the additions to the stock of money coming from its own expenditure on chil dren's allowances, "There is an obvious way of doing this, ‘The government can Dorrow Back the money that it is spending, In different circumstances the government might wish to en courage private invement, and in that ese it could do the op- posite, It could lend rather than borrow money on the capital ‘market (or repay some of the national debt in cash, which comes to the same thing) and inthis way increae the amount of money, Tower the rate of interest, and increase investment. This brings lus to the second role, which is not so fundamental as the fist bout helps to complete the sketch of the economic mechanism: © 9. the government shall maintain hat xe TRigT Tnduces the optimum rate of rate of inter Tie Ecowomte STEERING WHEEL a rowing money when the rate of interest is too low and ‘eading money (or repaying ona) WEEE Te ate of ae oo “Tires two rues provide the mechanism for guiding the movdern ‘economy-the missing stecring wheel. The principles are not really very dificult, Why have they not been applied long before ow? First there i the breach with tradition, The approach is un orthodox. Spending by the government must be regarded not a8 Something t be done when ican be “afforded” or when it ses ential to prevent starvation, but as a regular and painless way of maintaining posperey. Te should be undertaken when the society js poor on account of unemployment rather than when itis pros petous and appears to be able to afford luxuries Taxation mast be regatded nota the government’ way of earning is living, ut asa device fr reducing the incomes and thereby the expenditures fof metmbers of society. The quantity of money must be regarded hot as something sacred to be governed by the rules of some gold Standard with which the government has no right to interfere, but as a mere instrument for maintaining the right amount of spending. Government borrowing must be regarded not as a ‘measure of lat resort to be undertaken only in extreme emergency and in limited degree, but as 2 mateer of very litle consequence, the national debt andl the rate at which iis being increased or re- paid being completely subjected to the rues for maintaining the ‘optimum rate of investment. It x only to stress this breach with tradition thatthe third “rule” is provided 8, IL either ofthe frst two rules should cont the principles of "sound Trance” or of balan Daigo oF OF Tain Ure national debi “worse Tor Thee principles The “print any- mon12 EcoNOMICS OF EMPLOYMENT Tradiionatiom, misunderstanding, and vested interests by themselves could not have prevented the use of the economic stering wheel “The confit with tradition does not sem by itclf 9 suficient, explanation ofthe failure of modern sociery co regulate the level fof economic activity, ‘The fundamental logic of the new position is quite ealy demonstrable, I is almost scifcvident that, while the individual can be sent to prison for manufacturing money, the government need not fear the police. 1e may thus be guided by Giferent principles inthis respect. A Gray tablished modern stat is perfectly well able to borrow money or print money if i is in need of money. Ie is foolish for it to behave like @ bankrupt monarch whose credit iso low tht he can hardly borrow, who has little or no power over the arce metal that is used for money ‘within his ream, and who must perforce limit hi private spend: ing to the taxes that his parliament or his rudimentary fiscal machinery permits im to collect. Since the modern sate can ‘oblain the money needed for state purposes by borrowing i or by printing it, the modern sate can decide to tax oF not to x 26 Cording to which has the better effet on the body politic. Policy ‘an be directed in accordance with the eects of taxing, which are undoubtedly to decrease the money in the hands of the expayer nd to permit him to spend les. The advisability of taxation de pends only upon whether this reduction in income or wealth and the consequent reduction in spending is socially desirable. Similarly with the national debt. In spite of newspaper edito rials i is being recognized more and more generally that a nation does not get poorer any more than it get ri temally owned national debe increases. AIl that happens i that the citizens as members of the sate owe more to themselves (ie to each other) at holders of government stock. While a debt by ‘one nation to other nations oF wo the citizens of ether nations i 2 burden comparable to the debt of a man to other men, the debt her when the in Tie RcoNoMIe STEERING WHEEL 13 fof nation to its own cthens is not comparable in this way an isnot “burden” on the nation in the same way. "These arguments are simple to pose and dificult to argue against. They easily convince the unsophisticated and are accepted falter a strugele by almost all economists who have not grown too ‘old to change their habits of thought. Something more than ig rorance, therefore, must be sought as an explanation of the ge ‘ral failure to apply them to practical government. [Nat does the resistance from vested interests seem to be strong ‘enough to overcome the pressure ofall who would gain’ from the ‘maintenance of prosperity. Workers would be secure in their jobs and in the knowledge that other jobs are not dificult to get. Cap jtlists would be making profits on a scale that in the past has been experienced only in short periods of boom. ‘This gain need not involve any man’s los, for ican all come out ofthe avoidance ‘of waste from underemployment-waste that for the United States ‘duting the single decade 1990-1939 i entimated at over 500 billion ‘dollars worth af veal goods and services that filed tobe produced. Apart from such specialists as bankruptey lawyers, the only people who might lose by the maintenance of prosperity would be the insurance companies, the banks, and the endowed insti tions who live on the pure interest frm safe investments. These would find their incomes cut if mainaining prosperity neces tated a reduction inthe rate of interest. The insurance companies and the banks, insofar as they do not make it up in the greater ‘volume of busines that goes with prosperity, would have to find other ways of making ends meet, suc as investing in industry oF ‘charging higher premiums and service changes, but they are in a position to look after themselves, ‘The endowed instcutions—uni- ‘versie, research foundations, hospitals, andthe like—might en- counter difcultis if private gifs ate not suicently increased as result of general prosperity, but even a most generous compensa- ton by the government to such institutions would be a negligible ‘cst compared with the benefits of prosperity. There should be no sHrong resistance here.u RCONOMICS OF EMPLOYMENT ‘The main obstacles in the wey of an economic steering wheel are dogna (rightist and leftist) and timidity ‘There are ideological resntances which are to some extent bound up with the dead weight of tradition. These are lew su ceptible to change through enlightenment because they are based ‘on dogma rather than on mere inertia, There is a dogma of the ight and a dogms of the let “The dogma of the right sys that i is improper for the govern ment to go into busines or o interfere with busines. Its all but blind to the concept of business activity as a way in which the ced of society come to be provided. It looks upon a business simply as privately owned source of income “racket” to which the businessman is entitled by virtue of discovery or conquest Usually this is covered up by some rationalization, but there can bbe no other explanation ofthe idea that it is unfair for the gov: ‘ernment to compete with busines even in cases where i is shown that che consumer would benefit. The consumer isnot the person considered when it isa question of somebody “museling in” on ‘one’s racket tis posible for the government to regulate prosperity without competing with anybody besides the banks, and i seven posible to compensite the banks for any loss without making any appre: able inroads into the benefits of prosperity. But the principle of having the government regulate the level of busines activi is bad for the morale of the captains of industry, who could no longer be regurded by themselves or by others as the source ofall blessings of our age of progres. Furthermore any interference by the government isa dangerous precedent Ie might lead wo other actions being demanded of it in the general interest, some of Which definitely would confce with the private interests of mo- nopolns and others. This seems to be the reason why the ideo logical champions of the extreme right have denounced as bol shevism the first hesitating (not to say wobbly) steps ofthe New THE ECONOMIC STEERING WHEEL 5 Deal fn the direction of maintaining prosperity by governmental regulation of total spending. “The dogma of the left says that i is improper for private bust est to compete with the government. I is based upon a belit| that only 100 per cent collectivism can solve the problems of so ciety and thae private enterprise for the sake of profit isnot only ‘unjust and exploitative but must inevitably bring with it the ‘wastes, the disorganication, and the unemployment that has been sociated with capitalism in the past. This seems to be the reason ‘why the New Deal was in the beginning so foolishly labeled “as: inc” by many communists and socialist. There would seem to be lite force behind either ofthese ideological oppositions in 0 fa as businessmen prefer profits to principles, worker prefer employ: ‘ment to empty theories, and neither group is easily swayed by the ‘protessional interes of the organizers of communist parties or of ssocations of manufactures All these resistances would be of litle aval were St not for = ‘weaknes in the camp ofthe proponents of organized prosperity. ‘A-kind of timidity makes chem shrink from saying anything that, right shock the expecable upholders of traditional dotrine and ‘temps them to disguise the new doctrine so that it might bee mistaken for the old. This docs not help much, for they ae soon found out and it hinders them because, in endeavoring to make the new doctrine lok harmless in the eyes of the upholds of| tration, they often damage thei case. Thus instead of saying that the size ofthe national deb is of no great concer, i hat been angued that the increase in the national income will permit the Interest on the national debt to be raised without increasing axes, Instead of saying that the budget may have to be unbalanced and that this is insignificant compared with the attainment of pros perity tis proposed to disguise an unbalanced budget by having an elaborate system of annual, cyclical, capital, and special budgets asin Sweden, ‘But infinitely more depressing than thee particular timidites, Which weaken the forees working for the organization of prot:6 EcoNOMICS OF EMPLOYMENT peviy, isa more general capitulation before the prejudices of the public. Many ofthe people to whom the theory of controle is ex plained will sy, “Team sce that you ae right but meat people will not be able tose it, o that there is no chance of anything being ddone-" The number of people who take this attitude is mot alarm Ing. This i the atitude of the more intellectual members of the public. Equally discouraging is the auitude of les intellectual (or rather les self-confident) members ofthe publi, who will sy, Tt seems all sight to me, but Iam not an expert and T suppate there is something weong that I cant se.” And in this way policy is salled. The intellectual are afraid to push the propoxtl be ‘cause of unjustified contempt for the publi (or perhaps because fof subjective doubts s 1 their own superiority), and the public is afraid to acept arguments that they understand perfectly well because the “intellectuals” (for whom they have an unjustied reverence) have not come out for thet, ‘With one important difference the situation is like that of the famous emperor in the sory who was tricked by charlatans into parading before his people in his underwear. ‘The charlatans claimed thatthe imaginary new clothes they had made for him ‘were 30 fin that no one could feel them and 0 beautiful that no ‘one who was foolish or dishonest or unfit for his ofc could sce hem. And 30 neither the emperor nor any of his couriers oF his ‘people would admit that they saw no clothes until hey were he- ‘rayed by an unincimidated child. So itis with the problem of organiring prosperity. ‘The scholars ‘who understand it hesiate to speak out holly for fear that the people will nt understand. The people, who understand ie quite en, also fear to speak out while they wait for the scholars to speak out fast. The dilference between our present situation and that ofthe story is that itis not an emperor but the people ‘who are periodically made to go naked and hungry and insecure and discontented—a ready prey to less timid organizers of discon. tent for the destruction of civilisation, CHAPTER 2 The Meaning of Full Employment ‘THE PRIMARY objective of the “steering whee!” of Chapter | is to prevent inflation and deflation. "This isa rather negative Formulation, but the same thing can be expressed positive! ‘objective in positive terms, is full em Full employments dificult to define. 1 is necessary fist ofa to guatd against some common misin terpretatons by pointing out some ofthe things that fll employ. sent does not mes Inthe fst place it does not mean that everybody must work as many days in the year oF as many hours in the day ashe is able to work. Any number of people may refuse to work or refuse to do more than a certain amount of work at the current rates ‘of pay, and we may still ave full employment. eis not part of the objective to compel people to work if they prefer leisure In the second place, Full employment docs not ever mean thit everybody is working who wants to work at the curent rater of pay, even if he is reasonably ficient in his work and even if he is available at a place where such work is being done. "This is not very satisfactory. What is “undue” di ‘word “unde” looks asi inserted because ofits vaguenese—to permit the economist to squirm out of any dieu situation. ‘But che vagueness cannot honesty be avoided. Ie i in the nature of our problem, and any attempts to provide greater precision The S 7Is ECONOMICS OF EMPLOYSIENT than ist be found inthe subject matter deale with can only turn ‘out to be illaory and disappointing “This may sce rather paradoxical, Why should we define full ‘employment in a vay which permits the term to be used 10 describe a situation in which millions of people are looking for jobs and do not have them? These people will certainly regard themselves as unemployed and will think it very strange for asay that the economy is enjoying Full employment Deftationery unemployment most be distinguished from fictional tinemployment “The explanation is that economists have to distinguish between the unemployment which exists because there are not enough job available in the economy as a whole and the unemployment which exists Bocuse the unemployed men and the unfilled jobs fo not fit each other—their special qualifatons, sil, and loc tions donot match. This includes those workers who at any time fare on their way from one job to another. ‘The aeployment which ree om gee ineney “Tocated in the wrong places to get jobs is called “Trctonal. un employment.” The frictional unemployment isthe unemployment hie el emplomen ‘stnetion between defationary and frictional unemploy ment may secm pedantic othe unemployed person, le doesnot sce how he is helped by being told that luis unemployment is not defationary but frictional Bur uhe distinction must be made nthe como erste the bet destonsry unemployment citer called “oylanary unezployent” ‘The we of i term i Htly fovmake “ronal snemployed workers even mote biter, fa they wil io, and que gi, thao their Penonal point of view thir employment by no sean oltary. IC wee i woul nt be eel Atneplonment at al butt balay oF ply te enjoyment of liar, THE MEANING OF FULL EMPLOYMENT 19 because the two diferent kinds of unemployment call for quite diferent kinds of treatment. The solution for delltionary un- ‘employment lies in measures for increasing the total spending on ‘goods and services in the economy. Ths is because deflationary unemployment is caused by too small a demand for workers. The demand for workers too small because there ie not enough spend {ng on goods and services in general. Defatonary unemployment and its treatment are the subject of the parable of the stecring wheel Frictional uneny ayment, on the other hand, is due to if cies in getting workers and jobs together and must be dealt with by special devices for overcoming the particular frictions that are in the way. The relationship can be seem if we consider how the application of measures fr increasing the total of money spending can eliminate all the defationary snemployment and leave a great deal of remaining unemployment. This remaining unemployment is what we must cal frietional unemployment* If we start from a very severe deptestion, with a general in- sulieeney of spending and with severe unemployment, both de- fationary and fictional, ehroughout the whole economy in every region and in every branch of economic activity, dhe measures rede are such as will increase the overall money expenditure fon goods and services of all kinds. Such measures increate the ‘umber of availble jos, and since there are workers available in all pans of the economy, the newly available jt are filled and the number of wnemployed is reduce. As this process continues, the newly created job opportunities are not quite so easy to ill They cll for workers of special sills in special localities and itis more and more dificult to find them, We begin to find jobs looking for men as well as men looking for jobs. ‘As Tong 35 the number of men looking for jb i greater than 1m Giup 18 below and fare oni the bok, an important ditineion sl be ie heteen unemployment due o aman fons at tac ‘lomert de 1 een bons0 eoNoMICS OF EMPLOYMENT the numberof jobs looking for men, ics sill posible to increase the volume of employment (and reduce the number of unem- ployed) by continuing to increase cua spending and the number fof vacances, Some of the vacancies ate filled, and to that extent ‘employment is increased. But atthe process continues, more and more vacancies must be created foreach job actually found, since ‘many vacancies remain unfilled. Finally situation is reached in ‘which an increase i spending does not do any good at all Tt does not increase the number of jobs actually found and does not reduce any further the number of unemployed. The remaining tunemployed-they may ail be a very large number—vwill then ‘be thoe suffering from frictional unemployment. Frictional unemployment is compatible with inflation. ‘But a very serious trouble emerges long before the increasing | spending completely lees its eficacy in reducing unemployment. ‘As the number of jas looking for men increases and the number of men looking for jobs decreases, we reach a more and more in Aationary situation, Employers compete with each other more tnd more keenly for the sence labor supply in many parts of the economy. They lfr to pay higher wages or agree to demands for higher wages, because they are able to raise the prices of the products suiciently to cover the increased cost (and perhaps fever litle extra} This rates the cost of living, and workers ‘enna Surther wage increases to meet the increased eost of living for perhaps simply becatwe they are in a strong bargaining post tion, Employers agree to the incretes because prices are rising together with wages in a cumulative inflation ‘We have scen that severe widespread unemployment can be reduced by measures which work Uhrough 2 simple increase in spending. But if thie remedy is presi beyond a certain point, the increased spending comes up against frictions, and instead of increasing employment it increases wages and prices im an Aationary spiral. THE MEANING OF FULL EMPLOYMENT QL ‘The recognition that che remaining, fitiona, unemployment constitutes a different kind of problem from deflationary unem ployment has led to the suggestion that full employment be Alfined as the situation in which there are as many jobs looking for men as there ate men looking for jobs. But this will not do. ‘We would have two opposite evil, the evil of men not being able to find jobs and the evil of employers not being able to find ‘men to do jobs which need to be dane. The two evils do not add tap t0 a good thing. ‘They do not even cancel each other out “There is therefore no special merit in having them exacly equal Ie docs not give ns what we are ater. _Men without jobs is wore than jobs without men, At the point where the numberof jobs looking for men is equal to the number of men looking for jobs, any increase in spending makes the number of vacancies greater than the number of un- ‘raployed. The increased spending creates a certain numberof op- portunities for employment, not all of which are filled. The rmumber of vacancies i therefore increased while the number of| ‘unemployed is decreased. The equality i upset, but the new situa tion nevertheless shows & definite improvement. Iti an improve tent to have employment increased even if this makes the num ber of vacances greater than the number of unemployed. Fail ing t0 fill a vacancy is much les serious than failing to find a job, because it means merely the loss of an apparent opporeunity for some extra profit Furthermore, the profit opportunity which appears to be Tost is not even a real opportunity frm the point of view of society 1 rests on the eror of supposing the economy to have more pro- ductive resources than are really available. That there is no man available for the job means that itis not really posible for the Production to be undertaken which would have yielded the Imagined profit. Only if man were taken away from rome other activity would he be made available. But the fce that the alterna2 BcONOMICS OF EMPLOYMENT tive occupation keeps the man is primaacie evidence that he ‘would be mised even more in this alternative occupation than in the one in the mind of our potential employer. There would be ‘loss rather than a gain from the point of view of society if he were 10 be moved from his actual occupation to the unfilled jor. ‘On the other hand, the failure to find a job involves one of the mot serious of human frustrations—a man is deprived of the opportunity of earaing his own living and of finding « mean {nga place fr himself in society. Ie is therefore a great improve rent to enable an unemployed man to find work, even iF it means having more jobs looking for men than men looking for jobs? ‘There fsa poston, somevere between the tenes of lfaton and Aepesion a hich the sno he i eis—aemplyed men and unl Sates ac iia, At the pnt thre salty mot betwen the sie ie wo ems but betcen ei ently ts ange im the money ‘mend for gone and services Tn deproninns the jb opportune ceted by am incense In spending ae led ery qui, 00 tt te deze i de mune of unemployed igre thn the Ine in the numberof acces ‘Te sum ef the two urbe ined bya Sree in ening inna ss ‘uw the oppnite Be cue The no racane rented y am ince i Spending ae ney ical to lm a the Income fn voces We reer (Ban te decease in anemployed. The wm of te two number is ince by au fect Intending. Sete Breen the evo exe sation fh ines in spending Inteaier pana Jost as much aH ees hie point the aun of the fo number eat 2 nim fmployment A hs foi Teicomely tnt hoe who would ie eo adopt at = tad the point se'wbich unemployment suis tao ar entsing that pine Deter Intation and presen wih this oer Sntermeie pint at whith the fr of employment pl accion. Hut dis re resonable ‘mile pit lot wha we sane We do ot want to anime the ovo acm pus unemployed eee 2 mack more eos problem formant to be let fd a job than i for an employer 08 1 be able wo il yan, (Uon, of eoune, the fre to fll 2 vac, Wy caring the py of mater oro woo of demand for he prec. nde dros te aportnity af mzny eter en wo Gnd obs Tha ‘Ge the impotree of the sacmey it deine tom the indir woemploy spent for ich i repnuble) THE MEANING OF FULL EMPLOYMENT 23 1 does not follow from this that itis always desitable to in create spending as long as it increases employment—it does not follow that we need not be concerned at all about the increase in the number of unfilled vacancies. If we go too far in the drce- tion of permitting unfilled vacancies to increase in order to de- crease unemployment, we find that the scarcity of labor makes the bargaining power of workers too great. Any further increase in their eacity enables them to obtain wage increases 40 wide- spread that there resul a general increase in prices and a further Increase in wages. A cumulative upward spiral of wages and prices {set in motion. We have ination Full employment is where inflation begins. We can now give more precision to the phrase “wndue df Jn finding employment” As long at itis posible, by in ‘creasing the total of money spending, to increase the number of jobs available without causing inflation, the diiculy of nding ‘employment is “undue.” Some of the dificalty of finding jobs can in this way be removed, not only calesly but with a cleat and undoubted benefit vo society. But when the number of un fed vacancies ies» get that an ince inte al momey spending would feat in ination, the difcly in nding ewe Foyment vot sexily reduced and one en no lenge wih Sock ality tha ificly in finding employment “unde!” duly” dificult to find employment, is that level of em “BU which nition begs A Tllemployment palsy so ‘aims at that rate of total spending which brings about this level ‘of enployent. A lover level means neces unemployment which cam Be cured by an incre rate of spending. A higher tee sens ifton, wth alts dingrecablennes ad with mo cevsingy that it wll incene the Ylume of employmen,_As toga ay cae: aed an incense employ ‘ewe edingto-4 gover instonary oa We Be HOT Feached- the fllemplopnent Tot or peng4 ooNoMICs OF EMPLOYMENT Full employment is therefore that level of employment st which any farther increase in spending would result im an in Facionary spiral of wages and prices, ‘Temay setts too obvious but i is nevertheless necesary fo state that a fullemployment policy does not always ell for an increase fn the rate of spending any more than 2 “fullpitcher policy” fn a restaurant would «all for always pouring more water into the pitcher. Just as a pitcher which is already full does not get any fuller if still more water is poured into it so obviously if there is already full employment, the level of employment is wot raed by any further increase in the general rate of spend An increase in spending merely spills over in the increased ices and increased money wages of inflation. "This remark may Seem uncalled for. Iv is, however, not unnecessary. Some of the ‘ost frequently heaed arguments agains a fullemployment policy fcem to he based squarely on the unfounded belief that such a policy calls for a perpetwal increase of the rate of spending no fatter what the izcumstances. Frictionel unemployment cam be decreased by increasing labor mobility ‘There still seems to be something profoundly unsatisfactory bout our definition of fell employment. There may be millions ‘of people who are unable to ind work and who would not be very tmch comforted by being told that full employment has been reached and that their own unemployment is “only friction.” "They may be out of work because there is no Tonger a sufcient demand for dheir particular skills. There may be a shortage of the raw materials they must wse in their work, due to a scarcity fof the kind of labor which makes them. There may be similar Shortages in the supply of other products without which their product cannot be uted, They may be in seasonal trades or Industries in which a system of casa employment is responsible for their plight. They may not be aware of existing opporcunities THE MEANING OF FULL EMPLOYMENT 25 {for employment in other places where there isa sarcity oftheir particular skill, or they may know of them but not have the ‘means of going there. Or opportunities for employment in felds| somewhat diferent from their own may be blocked for them by discriminations in employment or by restrictions which dhose inthe field organize against the entry of others, “These are only a few of the thousands of particular reasons why @ particular penon or group of persons may be unable to find work, Yet they cannot be Felped by any general increase n spending. ‘That would merely cause inflaton, In all such eases the remedy isto be found in dealing with the particular situa tion-providing information as to the availablity of employment ‘opportunities, providing financial help to enable people to seek templayment a little farther from home, helping people to veuain themselves when thei skills become obsolete, removing discriae {nations and restrictions of entry to particular eecupations, im- proving the hiring practices of industries employing casual labor fencouraging employers to increase the eegulaity and continuity fof the employment they ofer, coordinating sexsonal industries to tha different products can be made by the same men in difer ‘ent seasons, or diminishing seasonality in other ways, Increased mobility rates the level of full employment. rach innrrems functioning ofthe economy in slay Tiations are vay not of moving owar Tall empl ‘SU thee particular improvements converts some frictional unem- lopment fp delaionry memploymcat. 1c permits a reer Tel of employment tobe atinedDefre the nfationry point it eached."Thefullemployment level comes to mean a eater level ofacual employment. There il rsd rctona une cemploynent The increas inthe mobility of bor (which i what Sith improvements busally amoun 0) makes it poe for an incre in tal spending to enable some ofthe nem26 Economics oP EMPLOYAIENT ployed men to fil some ofthe vacances for which they were pre- _siously unsuitable or unavailable. “The relevant difference between increasing employment by increasing spending (which isthe way to move from depression to full employment and permiting employment to be increased by increasing the mobility of labor (which is the way to rae the | fattemployment level itself) is in the different effects on the relation between unemployed men and unfilled jobs. Whenever employment is increased by simpy increasing the rate of spend: ing, the numberof jot looking for men is increased at the same time as the number of tuen looking for jobs is reduced, Vacancies nereae in relation to unemployment and the bargaining power ‘of worker i increwed, When the bargaining power reaches the Critical level beyond which it would bring about inflation, we have fll employment and cannot increase employment any more ty simply increasing the rate of spending. ‘But when an increase in employment is made possible by in creasing the mobility of labor, there is no change in the relation- Ship between vacancies and unemployment. The jobs looking for men and-the mien looking for jobs are brought face to face with each other s that it merely requires some additional spend ing for the men to fill the vacancies. There will then be fewer sacancies and fewer unemployed than before and no change in| the bargaining power of labor. Making ic possible for workers and employers to get together does not increase the bargaining power of the workers any more than i increases the tangsining power of the employers. This is why it permits an increave in pending to rate the volume of employment instead of cusing inflation, even if there is leeady fll employment. If achieving full employment (by rusing the sate of total spending) is like filling a vesel with water, improving the mobility of labor is like increasing the sue of the vestel 50 a8 to permit more water to be poured into it 'No matter how hard we try to increase the mobility of labor bby ar many special devices as uhere are special THE MEANING OF FULL EMPLOYMENT 27 special resistances to overcome in diferent parts of the economy, wwe shall never make labor perfectly mobile. Full employment will always leave substantial numbers of people unable to find work Jmmedintely, But we can increae the level of money demand 0.5 to reach full employment and we ean increase the mobility ‘of labor so as to minimize the remaining frictional unemployment. Achicing full employment i eine ta diminishing frictional wieiplyment. {In this book we shall primarily be concerned with the fist of these two taks, We shall be more concerned with the task of achieving full employment by bringing about the proper lev fof money demand than with the task of raising the level of fal cemployment by measures for increasing the mobility of labor. ‘This emphasis can be justified by the fact that more unemploy- tment can be prevented by working on monetary demand than by increasing the mobility of labor. It can also be justified by the fact chat the hindrances to the mobility of labor are of $0 many diferent forms in diferent situations tht special measures ‘an be recommended only after careful study ofthe nature ofthe particular resistances and not very much can be sid ofa general fature. But the chief justification for our concentration on the achievement of fall employment rather dhan on device for raising the fullemployment level itelf lier ia the logical priority of achieving fall employment, Only if full employment is achieved land money demand is adequate can the various measure for inciting De RODIN ST BGS EA ase Teta Tih car be put mre wrongly sil, We have been considering the posbility of rising the level of Fell employment tay reducing the immobility of Ibor and spoke of such an increase in mobility permitting an increase in employment. This must not ‘ve tnderstood to mean that an increase in mobility can increase ‘employment by itelf without any help from an increase in toe spending, Increased spending and increased mobility are not al-8 ooNOMICS OF EMPLOYMENT ternative means for increasing employment. Without an increase in spending, an increase in mobility would raise the level of full employtent without raking the level of actual employment. 1 would merely change some of the frictional unemployment ino defationary unemployment, thereby enabling an increase in spending to increae employment instead of causing inflation. (Of course if there is more than enough spending to reach fll employment, so that here is some inflationary presure, ani faeae in mobility will increase employment wichout calling for any further increase in tual spending. By raising the level of full employment it enables the excesive spending to achieve a higher level of actual employment, But here, too, the increase in employment depends on the existence of excessive spending which, without the increae in mobility, would have caused some inf tion, Except in an inflationary situation an increase in mobility ‘eanmot increase the level of employment unless i is accompanied by am increase in total spending, And if there isles than fll cemployinent the increase in toul spending would bring about the increase in employment without the increase in mobility Itis only whén the economy is just atthe level of full employ- rment that the level of fll employment has to be raised, by an increase in mobility, if an increase in spending isto result in an increase in employment rather than in inflation, Only if the pitcher is quite full docs it have tobe enlarged to enable more rater to be poured into it. Indeed this recognition of the fuiity of rushing about to Gnd jobs which do not exist of are not easy to find is one ofthe ehiet reasons for one of the most important fctions—the general m= mobility of labor. Workers are reluctant to leave the lite security they enjoy in being with fiends and relatives. They are naturally and reatonably afraid of going to strange places where thelr tiny savings may be exhausted before they find work. Immoblity is bell due in a large measure to the failure to achieve full em ployment and would be greatly diminished if fall employment fade movement es risky. THE MEANING OF FULL EMPLOYMENT 29 What is perhaps even more important is that in the absence ‘of full employment the breaking down of barriers to movement ‘an have the effect only of permitting newcomers to displace some of thoae who are already i the field. In such circumstances it is understandable that those workers who are frst in a Geld will do all in their power to Keep the sarce jobs for themselves aud will fercely rest any atempt to remove the protective re Strctons, Even though full employment is not enough by itself and should be supplemented by all posible measures for increas ing the mobility of labor, thereby raising the fallemployment| level (and the efficiency of the economy in general), the achieve ‘ment of fall employment isthe fst objective. Tater in this book (Chapters 13 to 16), more detailed atention| willbe given to techniques for raising the fulhemployment level inet. Summary. Full employment is defined as the condition where those who ‘ne TO WORE AE PREVATING Tate of pay can find work without undue difiealey. Te vagueness of "ailue diliculy” Hes in the nature OTe phenomenon and in the possiblity of moving the line which demavks deflationary unemployment, whichis absent when there is full employment, and frictional unemployment, which is compatible with fall employment. The «wo diferent Ws of unemployment call for quite diferent forms of treat: ‘ment, Deflationary unemployment can be removed by making the total spending on goods and services in the economy adequate. Frictional unemployment cannot be removed but some of it can bie transformed into defistonary unemployment by lessening the Frictions that prevent unemployed workers from getting together with snfilled vacancies spending is increaed, employment is increased wo, but long before all unemployment hae disppeared scarciies of particular Kinds of workers result im an increase in the mmaber of jobs30 ooNoMICS OF EMPLOYMENT looking for men in relation to the number of men looking for jobs, and thie results in increasing inflationary pressure. ‘There isno particular interes in making the number of vacancies equal to the nurnber of unemployed or even in minimizing the sum of the unemployed and the vacancies. This is because an unem: ployed man isan infinitely more objectionable socal phenomenon than an untied vacancy. But once full employment has been reached, attempts to increase employment by increasing total spending lead to inflation rather than to increased employment. "Undue di 1 30 that full employment "Undue diye daocedcned 3 Fried tthe level where inflaton began CE a aT ae TE only by edacing the (eeonal unemployment and hereby raising he level of fall crploymen oc. Removing rcton permis sone of te tnemployel men to get tage with some ofthe ul ob dat on ingeue i tnd pending Gn incre employe Sout suenghoning te baaining power of workers any more than a of employer ‘chering fll enplopment by aranging fran adequate tt tow of opening Ie pronto mcanes fot rating the level of full employment by fnceasing the mobility of abr, becuse i the sina f the provision othe tll ow o pending which tr nccrety foe rechng ful enplopnent, meses foe te Penal ee of fall employment by removing ction are foe Tar and would be rsned by those howe jos ane protected by the fins from competition. “Tecmigu! for raging the achcable level of full employ snent willbe dicuwed ltr inthe ook, CHAPTER 5 The Importance of Full Employment "THE MOST obvious benefit fom full employment is dhe adi- tion to the goods and services which we can enjoy by having ‘prosperity instead of depression. This benefit isso great that we fre inclined at frst to be surprised by its magnitude and then to Suppose that it must be the most important reason for having 2 fullemployment policy. Inthe depression of the 1980's we lost bout 500 billion dollars worth of goods and services which we Tailed to produce but could have produced if we had had full ‘employment, Some recent estates make the loss high 31,000 billion dolla while some carier and extremely conservative ‘nes go a low as 200 billion The economic gain from full employment are enormous. “The wide range in these estimates results fom a change which took place during the war in our idea of what itis posible for the economy to produce if ie is working at full capacity. Before the war (and its preparatory armament activities). our national Income was running at between 50 and 80 billion dolla per annum, and those who spoke of the posbility of producing 100 Dillion dollars per annuum were often regarded as irresponsible, optimistic dreamers. The wat showed that we could produce more than twice che 1938-1999 average and thatthe optimistic dream crs had been far too conservative. ‘One reason why economists undereatimated the potential out pt of fall employment wa that they Bred this fom the mum ber of people atualy out of work. Insuficient attention was given to potentialities of increased output by people who were engaged s88 ECONOMICS OF EMPLOYMENT in relatively wasteful occupations but could be shifted to more productive ecupation when there i need fr the product. Tn fall employment workers are not tempted to go slow for fear of working themselves out ofa jb. Mor effective we is made of equipment which otherwise would be idle a large part of the time. Much ofthe unemployment in depresion is the “disguised unemployment” of people who stay on the payroll but who are rot relly pulling their ull weight, este elimination of these testes that brings about much of the great increase i Outpt “Tia coe With all employment. “Ribther coniributing factor tothe great increase fn output in full employment i the geste eiceny in the we of resources that flows from the inceae in the mobility ofthe factors of provtction. Because ofthe pester security of finding jobs in the few poston aswel a bce many restrictions are relaxed whet workers are scarce, factors move more easily from where they are lea productive to where they can be more productive. For our purpose we do not have to go into the problems con nected ith geting exact meas ofthe los from havi deprenion. We need not examine the dificulis of measurement Connected with such things a8 changing price levels oF the re tive productivity of the employed and the unemployed. We are incerxed here only in geting a rough idea ofthe gin tha would have acrued from having full employment. Thee ino doubt that it comes wo a very lige amount, ofthe same order of mag ide a the cont to the United Sats of World War IL ‘Even ifthe loss daring the depron should come to no axe than the amount ofthe present American national debt i pe: sents something infinitely more important. The national deb, at wre shall ace in detail in Later chapter, docs not constitute tational impoverishment such as would be represented by the soos that the money measure ofthe national deb would! beable to buy. Bue the loss from not having had fll employment inthe 1980 can legitimacly be expresed in real terms. Real houses and automobiles and food and clothes-§5,00 worth atthe lest THE MPORTANCE OF FULL EMPLOYMENT — 38 for every American family-conld have been produced in the de presion years at net addition to the useful goods and services that actually were produced Full employment yields individual economic security. ‘The emendous gain in potential goods and services is far from being the most importane of the benefits that would have ‘been derived from a fullemployinent policy. The higher teal in ‘comes of full employment may indeed not add very much to the real wellare of the people. The benefits may al be absorbed in the creation by advertsing of grater needs so that people will bbe no happier with che lager real incomes dhan withthe smaller seal incomes (although i is dificult to imagine that this i true for people realy sulfering from want of basic necesities in the eps of 4 depresion). ‘What cannot be destroyed by such an artificial increase of ‘want isthe fectng of individual security which would accompany {ull employment. ‘The knowledge that one is able to keep his presen job, or find another one easly if t should be los, crates fn improvement in one's state of mindinvolves a relief feom anxiety—that is much more important than the increase in real income of goods and services. A similar security will be felt by businestnen and investors, who will not have to worry about the posibility oftheir plans being spoiled by a general business depression. They will be able wo concentrate on such causes of Joss or failure as are duc ta their own inadequacies or to particu lar misfortunes, and this concentration wil further inceste the ‘overall eficiency ofthe economy. Security promotes progress: ‘One extremely TmpoTEMt result of the confidence and secu rigy ofthe individual that full employment affords iis effect on the smoothness of operation and the progress of eur economy.M ECONOMICS OF EMPLOYMENT Ina workd of unemployment, with alternative jobs hard vo find, men naturally seck security in tying up the jobs they have so that they cannot cxsily be fred. This substation of job security for employment sccurity is not only a source of particular in: ficiences, in business and in government, but the basi fr the srowth of bureaucracy-another serious peril wo our general fi ‘dency and to our freedom. “The matter would not be helped by climinating the formal tying up of jobs. Security of the job would then depend even more on not upstting one's superior too much. Enterprise and fniative are very dangerous for the individual in search of security, It x better to do nothing except of proper auehoriza tion and then you are safe-you can produce 2 piece of paper as 4 comeback and pase the buck to someone ele. But if jobs are ‘easy to get, men of ability and intative do not permic themselves to be tied down to such depressing conditions, and the resulting increase in enterprise and experiment greatly ciriches our society Such a freeing of initiative and of progressive change is not limited to bureaucratic organization but spreads throughout the ‘economy. Ofe of the greatest inhibitors of progres isthe recogni tion that some people will be displaced, and those who would suller from the change are often able to mobilize suticientsym- pathy to prevent the improvement from taking place. The best remedy is, of course, to give adequate compensation wo those who sulfer from something done inthe general interest. IF de change is really worth while there must remain some benefit ever after full and generous compensation has been paid. But frequently the machinery for making the compensation is too elaborate to tbe practicable, and more often sll there ate other diticulis, political or technical, in the way of arranging such compensation "The change i ill in the social interest and should be undertaken even if it means that there will be a diferent constellation of privileges, no more objectionable in general than the old constel- lation. But such a change is often prevented by reluctance to impose severe and undeserved hardships 1f there are full employ THE IMPORTANCE OF FULL EMPLOYMENT 55 ment and a sate of business prosperity, nobody need be made to sufler too much, and so this obstacle to progress is considerably siminished. Those who ate wnlucky are not destoyed—they have nother chance and the game can go on, Full employment contributes to human dignity. “Fen the security ofthe individval isles important than yet another psychological benefit that exch individual would obtain ‘This isthe feeling that he i a sigoifcant and useful member of society—that there isa place for him where he is needed. During the depreson of the 1930's moxt of the unemployed in the United States were fed and housed better than fulltime workers jn many other councries, but the stigma of charity ot relief re sulted in their being psychologically much worse off and much lunhappicr than peesons with far lower standards working hard in other parts of the world. More important than the material ‘gine and the security isthe fcting of significance in the social seating. "There will be other benefits for individuals. When workers are hard to get, the conditions under which they work will be im- proved. Employers competing for workers will apply to this part oftheir activity some of the ingenuity and resourcefulness which Jn the past has been entirely employed in serving the whims fof the cutomer. In the war and in the immediate postwar prot pevity we came across the strange sight of employers, in thelr at fempts to get workers, advertising the cleanliness and other at twactve conditions of work. These frst atempts are clumy and ineficient and often applied in a spirit of rxentulness. Employ «ers are so conditioned that they believe i only night, or at leat inevitable, for them to have to apply themselves to meeting the dastes of customers, but they consider it strange, and sometimes ‘even outrageous, to have to be concerned in a similar way for the wellbeing and even for the secondaty preferences of their ‘employees. Continued full employment would get employers ac-36 ReONOMICS OF EMPLOYMENT ‘eustomed to having to please their workers and would increase their eficieny in discovering the chins that really matter to the ‘workers and in actually bringing them about. Ulkimatey it will become clear to all chat the ime spent by workers at their work and the stains and pains and the happineses of work constitute 1 most important part of the lives of the great majority of the population, It will cease to sem strange for the welfare ofits workers to be considered one of the most important, if not ‘the most important, of any factory's products, [At the same time, or rather af the most significant clement inthis improvement of conditions, there will develop an attitude ‘of respect of the foreman or employer for che worker. The dig- nity of the worker as 2 human being will be more often and more generally recognised, fr fany worker not treated decently he cam go away somewhere ele, ‘The worker's greatest protection is his power to go somewhere cle, but only iC itis a real power based on the existence of satistactory alternative jobs and not 3 rere legal right tendered worthles by «condition of tnemploy iment which makes altemative jobs doubtful or diffcule to find. “The power Yo go somewhere else will do more to improve ‘conditions of work than any amount of legislation of conditions for of participation of workers representatives in factory manage: rent, wseful as these might be for many purposes. Full employment weakens nonfunctional discrimination. Full employment would serve to enhance the dignity of the worker by weakening and ultimately eliminating discrimination along nonfunctional lines sich as race, ceed, and color. With workers hard to get, employers will not be able o indulge their own prejudices or rellect other people's prejudices in hing work: crs. Competition will force them to be liberal, at indeed i did to some extent during dhe var. Perhaps mote important than simple prejudices in fostering racial, religious, and other nonfunctional discriminations in hie [THE IMPORTANCE OF FULL EMPLOYMENT — 37 ing workers is dhe economic interet of a group of workers in protecting their scarce jobs against competition from ouside. With fll employment, the searctyof jobs being eliminated there Js no longer the economic drive for such protective utilization of these discriminations. Full employment further raises the dignity of the individual by indirectly improving the distribution of income and wealth By weakening restrictions of all kinds it does much to remove the inequality between pay in diferent occupations Ie helps more than any direct Ieglation to remove the evils of sweated trades and by making enterprise easier diminishes the inequalities be tween the incomes of businessmen and those of managers and ‘other employees, Fall employment is exentil to protect democratic society aginst, “jc coMET a But even these benefit for the dignity and the weltare of the individual are not the most important guin to be obtained from a fullemployment policy. For it is not only the security ‘of the individual that is destroyed by unemployment. AC the present moment in history che security of our whole socal order and of those freedoms which remain to the individ deptesion are in serious danger. ‘The democratic wcity devel ‘oped in the lst two hundred years seas almost destroyed by the se of fascism. We were suceesful in one war against fascism, but we may not be so lucky ifthe same thing happens again, ‘sential ingredient for the rise of faci ix the failure ‘of capitalise society to provide fall employment, Hundreds of ‘eatons have been given forthe rise of fascism in Germany, and there is probably some truth behind most of them, bus there can bbe nodoube that vevere and prolonged unemployment was a necer ‘sry condition without which fascism could not have conquered Germany and then almost conquered the rest of the world. Fascism was able to grow only because there were millions of38 RooNoMICS OF EMPLOYMENT men and women who saw no place of significance and dignity for themeeves in the existing order and were thus more easly per sade by the Nazis that they had nothing to love by a new order. Great as is our attachment to freedom and democracy, thei im- portance fades for people who are continually harassed by the Ansietis and the humiliations of economie insecurity. Full em: ployment ix a necesary condition for the safeguarding of our emocratc way of life ‘Some of the critics of capitalism, seeking a society greater freedom, a deeper democracy, and a more consuming con: ‘em forthe dignity ofthe individual, seein the alure of capital: jam to provide fll employment not only a reason for eying (0 change the sate of affairs but also a means for engineering the necessary change, The Marxists frequently speak as if an in ‘vitably increasing severity of capitalist depressions will be the ey to-a better society. Increasingly severe depressions are sup- pote to be scheduled to bring about the proletarian revolution And the establishment ofa etter society based on the brotherhood ‘of man, ‘The believers in such a program for world history tend to be extremely suspicious of any plans to prevent or even al: leviate severe unemployment. Such plans would remove a funda mental force that i cat fr the role of moving the world int the ttopia, They are therefore to be found together with the most diehard of reactionaries in opposition to schemes for dealing ‘with the problem of unemployment. They are strongly opposed to "imaking capitalism work” and are more concerned about thelr “escalator” to the better sacety being destroyed by full employ: ‘ment than is consistent with their dogma that itis impossible to achieve full employment under capitalism, Literal reformers, progresive democats, and non-Marsan s0- Gals (ike those in the British Labor purty), on the other hand, have no patience with doctrines about the revolution and the thereafter but prefer to concentrate on practical measutes whose ‘fects can be seen aid tested in the here and now. They are very much concerned with polices which would succeed in providing Tie IMPORTANCE OF FULL EMPLOYMENT — 39 employment and prosperity even if they should incidentally be helping capita by making it more satisfactory to workers. ‘Until recently it was posible wo believe that these to groups ‘evolutionary Marass on the one hand and democratic reformers fon the other represented two alternative approaches to the im: provement of our soity. But the experience of fascism and of the development of the Russian “proletarian revolution” into a totalitarian slave state have made it imposible to maintain a scdolaly neutrality Between two such methods. A policy of let ting things giow worse so that they may then grow better, apart from the immorality of the preventable human suffering that i Aeliberately accepts, would almost certainly put the reins of the fuatute notin the hands of the stopian revoluionists but rather into the hands of unscrupulous fascists, as happened in Tay and ‘Germany, And even if power should be seized by the minority which profesed belief i a “dictatorship ofthe proletariat” whose “eainy” it was to widen the field of human fredom and dignity, its first consideration would be to consolidate its power against the majority without. 1 is vai, and a¢ this hour in history sipremely foolish, to sup pote that in a democracy liberty ean be spread by a party which has to retort to revolution by a minority because itis unable to ‘convince the majority. Such a minority will have to apply mone land more force to maintain itself im power against the majority. “The result va progresive limiting and destruction of human fre- dom and dignity sch as happened in Russia, Whichever the course of events, failure to apply afullemployment policy in the exist ng capitalis” society will lead to-one for of fascism or another. ull employment may prevent war Fascnm is nt the most immediate and pressing ofthe dangers from which on fullemployment policy can deliver us. Since the fend of the war i¢ has become clear that behind all the talk of peace and ofthe United Nations, the significant development has0 ECONOMICS OF EMPLOYMENT ‘een the squaring of of the ewo remaining gre powers of the ‘world, America and Rusia, in preparation for a posible third world war. This war isnot inevitable, but the greatest influence working for its probability is the Russian dogma that i i inev: lable. The Russian dogma says that capitalist countries cannot maintain prosperity, that inevitably they will fall into ecomomic ‘rises and depresions that however wellntentioned may be the present leaders of capitalist states, the inevitable depresion will Dring fascists into power, and that these fascists will then lead their countries in a holy erusde against the Russian communist fatherland. The Russian dogma that such a course of develop- ment is inevitable forces them to prepare for this eventuality and to resist any attempts at organizing world peace. Ie forces them to interpret every proposal for preventing the war asa trick de- ‘sed only forthe purpose of llling their suspicions and weaken ing their preparednes. The preparednes of the Rusans forces the Americans tobe prepated, and with both sides prepared, what hey ate preparing for becomes almost inevitable. The only escape from this conc lie in persuading the Rusians thatthe United States can and will maintain prosperity and thus prevent dhe rise of fascism. Only by the actual demonstration of such permanent prosperity through a fullemployzent policy ean we hope t con Vince the Russians ofthe falsenes of their dogma and to avoid the catastrophe ofa third world wa ‘This lis of the benefits from full employment is 50 impressive that many others of considerable importance must be omitted be ‘ause they would seem picayunish in comparison with these ¢= sential conditions for survival. Indeed the blessings of full et ployment might even seem to be embarrassing in their plenitude and their importance. But their ubiquity wil cease to embarrass us if we consider unemployment asa serious organic disturbance Which would naturally have innumerable repercussions in ot ‘extremely complex society. Each one of thete repercussions would bea symptom of the same basi ines, and meaty all of them would be scaly harmful FE INPORTANGE OF FULL EMPLOVMENT 41 1 we had been living in a world of fll employment and were then transplanted toa world of unemployment, we would look for the symptoms of the malady and would not be in the least sur prised to find them all ver the place. But because we start with ‘he world of unemployment and consider whae would be the symp- toms of the absence ofthe disease, the procest of extaloguing the ‘qualities of health looks suspicion ike an undiseriminating Hist ‘of everything desirable. Full employment revives the spirit of liberation, Any remaining surprise at the constellstion of benefits from full ermployment will be relaxed when i x realied that the sate ‘of healthy full employment is nothing else chan the kind of society thatthe Hberal thinkers of dhe eighteenth and nineteenth Centuries had in mind, Their great mistake was to astume the ‘existence of an automatic tendency toward full employment and ‘no need for fullemployment policy. Because ofthis mistake they were unable to persade the nations vo accept free uade. Because (of this mistake the freedom of the individual, undermined by ‘conomic insecurity, was subjected to the perils that have nearly wrecked our free weiety and that may yet succeed in wrecking it if we do not soom remedy the great defect. All the benefits we hhave considered and innumerable others that can be discovered are no nev dreams. They are the same lines in the development ‘of a fee society which were seen by the great prophets of libe jm and which, from a slighdly different angle, were glimpsed anew by the prophets of democratic socialism, To raise these prophecies from the dust we need only be sure thatthe missing foundation of full employment is thereto provide the economic trss om which alone the other virtues of a fre society can stand “The arrival of the atom bomb has complicated this picture somewhat and may have taken away the time necessary for a Tong-erm demonstration of the posit of permanent prosper ity under capitalism, Atomic preparedness may result in a pre2 EGONOMICS OF EMPLOYAIENT vventive war breaking out before such 2 demonstration can be tnade. There is alo the possiblity, as many people believe, that it is not merely suspicion which is responsible for the Russian sabotaging of the peace but an ambitious determination to spread the Russian empire over the whole planet~an ambition dis fuised as a erusde for the dictatorship ofthe proletariat in the hhame ofa religion which finds adherents throughout the world Temmay be that atomic preparedness or Russian imperialism will yet bring about «third world war even if we do have a fallen ployment policy. Ocher and more dangerous action may be neces fry in attempts to prevent the destruction of civilization by huclear energy. But as long as it isnot certain that atomic pre predness or Rosian impevialiom will bring the catastrophe, there is still a chance that it will be prevented, and for that ‘chance a fullemployment policy is esential. The chance that it may prevent the atomic war is sil the moa Tipo Fhe eons Tor tava tatremproymen-poieg Summary. “The first visible benefit from full employment is the purely ‘economic gin of the goods thatthe unemployed could produce it put co work. This includes the benefits from the elimination of the “diguised unemployment” of those who, while employed, are hot propery utilized in a depression and the benefits from the tore eticent use of productive resources because of the greater mobility of labor eat full employment makes posible, Second, and more important, is the increase in each worker's economic security from knowing that iis eas fr him to leave his job and fet another one, his fceom from the Fear of being thrown into 8 mad competition for nonexistent jobs 2 Seve paragraphs this caper Bane een adapted Groen my ati “An Tere Pll Employment Pair plished in Iteration Poros ‘Problems, Janary, 1946 and tpn in Placing end Paying for Fall ‘Enploymen, Pinson Uaivenicy Pres 194 THE IMPORTANCE OF FULL EMPLOYMENT 43 “The individuals economic security is most important 36a safe guard against oppresion or exploitation. With the individual fable to find other occupations, his employer will have to com- pete to Keep him, and this will do more than anything else to improve the conditions of work. Then there is the value to the individual of knowing that he is needed and has place in the ‘contomy. Nothing s more important for a man’s self-respect and happnes. Full employment isin this way the greatest safeguard of| the dignity and the feeling of worthiness of man. all employment indiveetly reduces economic inequality and is indispensable ae safeguard of the democratic way of life against totalitarian adventurers. Finally, fll employment is needed to dlemoustrate our posible peacetulnes tothe Russians so that they will not feel constrained to prepare for and thereby to make in cvitable third world war. "The extreme importance of fll employment and the enormous ‘number of ways in which it seems to be important might rake ‘one suspicious. But the suspicion disappears if we consider these ‘benefits as the manifold symptoms of social health restored by the xemoval ofa basic malady. The benefits are the same a5 those en visaged by the old prophets of liberalism and of socialism.Part II The SolutionCHAPTER & Employment and Spending “THE BASIC principle of the theory of employment is simple. A worker can find work if an eaployer decides to employ him, and the employer will decide 19 do so only if he is able to sll the worker’ product for a slicently high pric. “The question: “How high is enough?” rises many problems which we must leave until later, All we need consider here is that in any situation there is some price ofthe product, related in some way wo the costs of production, which is just enough to make the employer decide to employ a worker to make the produc. This ithe “adequate” pi How many workers the oaployer Win employ depends on how much of the prodac he detest have pods and tht de pends on how much of che an well Quan adie pit, of Toure Hf more cn be sl, tore wil be product and sore workers wil be employed in making it If lew cn be sl, Tt {al be proced and fer workers wil be employed. Phe ft four capt of ths prt (Chaps 1 7) ate somevbat more i ova tha the roof ee Book. Gear ures and lags tie Lepto the appenine o tw capt and thaw wo do not Ed flags bell tin merely ep the relerenes 10 de appenties "The igen in the txt ca be followed by anyone who cana sb trac multiply, and ide small membre and who elie hat eer ek tan for a number which we ae in the procar of uring out I Is po Sle to ship hi agra witout mining any of the argument Sa dhe ‘hapten. The only parse ofthis algebra eo mabe the text ser 1D Iolo, Render whoa ale algebra ar indeed rather hn ep tnd tou lip ie Renden who sil nd thee Quer difele ca ip sn ager and gp onto rad Chap. 8 on “Funcoel Finance” chs in. They wl note hindered by th In flowing thereof the Hook {exept for Cap. 1748 RcoNoMIcS OF EMPLOYMENT The volume of employment depends the rate of spending How uch can be sold depends on how much money the customers are spending in buying it, Many considerations in ‘uence their eagernes to buy any particular product—the state (of fashion, the prices and availability of all the other products that might be bought instead, the prices and availability of all ‘the items that are ordinarily wed in conjunetion withthe product in question, and so on almost ad infinivum But since we are concemed with employment not in some particular industry but in the economy as a whole, we do not have to go into all these complications. The amount sold in the cconomy as 2 whole, and hence employment in the economy as 2 whole, depends net on the amount of money spent in buying fone product rather chan another, but on the amount of money spent altogether on all currently produced goods and services For our purpose it docs not matter very much if consumers ive up buying one thing in order to buy something ele instead, ‘This may be devasating for uhe employment in the manu facture of tie tem given up, but since employment will increase in the manufacture ofthe newly fashionable item, total employ ment need not change at “The general or overall level of employment thus depends on the wal ate at which money is being spent in buying all kinds fof currently produced goods and serves. A fullemployment policy muse dherefore consist of measurcs for getting and keeping the proper rate of total money spending, eis assumed here, for simplicity, chat the spending, the pay ig and (in the case of consumption expenditure) the consum i all take place atthe same time. But really significant here, and dhroughout this argument, ae the purchases (or from the other side the sls), even if some or all ofthe payment (or some ‘orall of the consumption) should take place in some other period, EupLovaest AND srEnoine 49 Employment depends on spending in socialist as well as ix capitalist economies, ‘The dependence of the volume of employment on how mach of the product can be sold at an adequate price is not pecliar ‘apials sociery, as is sometimes suggested by sentimental socal fists who think thae this problem, together with almost every ‘ther problem, would disappear if we sopped using a “profit ‘ystem.” It is true that in a profic system the adequate price i fone which provides an adequate profit for the employer. When fever the requisite profit is not forthcoming, the employer will ‘not want to produce the produet or to employ the worker. In a nonprofit socialist cconomy there would be no consideration of| profit. The worker would nevertheless still nd that whether he [is employed depends on whether his product can be sold at an adequate price. In any rewonably elicient society of free men, capitalist or socialist the citizen must be free to spend his income according this own preferences. He must have @ money income so that the can go into store with i and decide which things he wants to buy and how much of them and which things he docs not think worth buying atthe prevailing prices. Since the purpose of the economy is t produce the goods and services that the citizen, 8a consumer, wants and not merely to make bien consume the goods that the producer happens to have produced, there must be some way of letting the producer know what the consumer wants and what he doet not want. To do this is the function of| the prices thatthe goods which have already been produced can fetch in the sores. 1 sone goods have been produced which the consumer docs not fancy, the shopkeeper will have to cut their price 10 get Fld of them. The low price then indicates to the manufacturer just how low is their usefulness to the consume. ‘The cost of producing an article (if properly reckoned) represents the value0 CONOMICS OF EMPLOYMENT and the usefulness of other things which can be made with the productive resources involved. A price below this cos is evidence thatthe produc is valued les by the consumer than the alterna tive products. I is therefore an appropriate signal to the mane facturer to reduce ousput, in the social interest 90 a8 to set free the resources to be used for something else that che consumer would preter to have “The roles for determining the adequate price in a socialist society may be quite different from thote applicable to a capital jst society. There may be no whisper of 4 suspicion of anybody ‘being concerned with wecking 2 profit. But as far asthe worker is concerned he lees his job, exacly like the worker inthe profit system, whenever his product cannot be sold for an adequate price. In a socialist society, just as in a “profit system,” the number ‘of watkers who can find employment in each industry depends on how such of the particular product can be soldat an adequate je. In the same way the tot volume of employment in the Economy depends on the total amount of money spent on currently produced goods and services of all kins, ‘Socialists never worry about the voluine of employment in a socialise society because they ame, if they ever think about it Si all, that there will be some authority Which wil see to that enough money is spent to permit enough goods and services| to be wold at adequate prices, so that there will be work for all, ‘eho want to work. Thi i a perfectly reasonable assumption for 2 socialist society, in which the authorities know that it is their esponsibility to keep the economy running in good order. But just as the dependence of employment on suficient spending is not limited to “profit aytems,” wo the possibility of having an authority 10 sce that enough money is spent is not limited to Socialist economies, There is no reaton whatsoever why there Cannot he an authority doing exactly the same thing in a capital iat society of profit system. We see, therefore, that the problems of employment are the EMPLOYMENT AND SPENDING 51 result not of a profit system particularly, but of any money-using | system, irrespective of whether it permits, encourages, ot pro- hibies the seckng of profits. Employment problems can aise in any. money using system simply beeause in any moneyasing 3 ‘car Rea of oa peng can dep om the Teel reed for fall employment The flow of spending must not be confused with the stock of ‘money. Experience shows that itis necesary to suess the obvious fact thatthe flow of spending isnot the same thing asthe stock of ‘money in existence in the economy and tat the level of employ: ‘ment depends on the former and not on the latter. The level of ‘employment depends on the flow of ats of payment involved in the spending, not on the stork oF amount of money in existence It alo is necessary to declare emphatically and to repeat fre quently that thee does not have to be a dallar in existence for very dollars worth of goods in existence ov even for every dolla’ wart of goods that i produced in the course of a year or any bother arbiwarily chosen period of time. What matters is only the rate at which dollars are being spent—how much per annum for how much per week or per month. ‘This emphatic injunction not to confuse the fw of spending With the stock of money is necesary beause the same rate of money spending can take place whether the stock of money in ‘existence i lager or smaller and greater or smaller flows of spend ing can take place without there being any change in the amount ‘of money in existence IF the tack of money is 120 billion dallas while the flow of expendicure is 240 billion dollar a yea say thatthe velocity of exculation of money is per annus, mea ing that each dollar in existence is used tice, om the average in the course ofa year. I the stock of money ix 80 billion dollars we ay that the velocity of ctculation of money ie § per annum 5c appendix t Chap 4 aeDoecause each dollar is spent three times, on the average, in the course of a Year. ‘Of course some dolla bis will change hands (be spent) hun. reds of times in the yeat, while others will be wed only once for perhaps ot at all, The average number of times is obtained by dividing the total of payments (in dollars) by che total number of dollars in existence. We divide the 240 billion dolar of money ‘payments by the 80 billion dollars of money in existence and get the figure 8, which we call the average velocity of creulation of money. If we multiply the stack of money (80 billion dollars) by the velocity of circulation (S per annum), we naturally get Ick to the number we started with, which vas the flow of spending (240 billion dollars per annum). This digresion would not be necessary were i not for a com: ‘mon notion that there should be some sort of correspondence beeween the goods of a society and its money—that for every dolls worus of goods there ought to be a dolar i somewhere ifthe economy is to work propery. Feonomits cs caped from that notion a long time ago but find ie dificult co tet out of thie habit of speaking about the stock of money even though chey know that itis the fow of spending and not the stock of money that realy matters. The velocity of circulation is the device which permits them to keep mentioning the stock of ‘money while really comidering the flow of spending. since the stock of money, when multiplied by the velocity of eirulation, is nothing but the rate or fv of spending The traditional procedure for describing the course of eco- hotnie activity i to begin with a stock of money (M), multiply thie by the velocity of circulation (P), uhus geting 2 complex symbol (MY) to represen the How of spending. It would be much simpler and les confusing to consider only the fow of spending and not to pay any attention tothe stock of money tall (except ‘when considering the posible effects of changes in the stock of| See appendix 10 Chap 4 02 PMPLOVMENT AND SPENDING 58 money on the Now of spending—which we shall be doing in later chapter. These would not be much haem in keeping to the more complicated traditional procedure, but many nonecon: omits sill have something ofthe old dea that there ought to be dollar somewhere for every dollar's worth of goods (in existence ‘or produced in the course of a year) No such direct relationship exists or is desiable. The only thing that maters is the flow ‘of money spending. The stock of money can be of significance ‘only to the degree that it may influence the Bow of spending, never as something apart from or in addition to the Bow of spending Spending consists of consumption and investment, by busines, Dy individuals end by gowernment Since the volume of employment depends on the flow of money’ spent on currently produced goods and services, it is necessary to consider what this flow of spending itself depends on. Since ie i only by working on the forces which govern the flow of spending that we can hope to develop any ellecive employment policy, we mate divide up the tol How of spending into such pares as may be governed by diferent forces which can be worked fon in eilferent ys “The fist distinction we must make is between spending on ood and service that are currently consumed (i, consumed in ‘whatever period we are considering) and spending on goods which are not curently consumed. The fist part of the low of spend ing-that pare directed to currently consumed goods and serves ‘on the items that make up the daily necessities and luxuries of| the population-is called “consumption.” ‘The second part—that directed to goods not curtently consumed therefore necessarily spent om goods added to stocks of material, machines, factories, See append to Chap. 48 ‘Serves ne they have no darby and have #9 Be eoosmed crenly or ot at ll anno ener the send etegoryoA ECONOMICS OF EMPLOYMENT houses, and all the other things which consitate our real wealth. ‘This spending on additions to our real capital i called “inves ment.” The total flow of spending thus consists of consumption and investment." “The word “consumption” is wed to represent aot only the flow lof money spent on goods and services currently consumed (money ‘onsumption) but alo for the corresponding caunterlow of goods and services received and consumed by the people who spend the ‘money for them (ral consumption). In the same way the word investment” is used to represent both the Row of money spent fn goods not currently consumed (money investment) and also the flow of goods bought with the money investment and added to the capital stock (real investment. To prevent confusion itis sometimes necessary to make explicit whether we are talking about money consumption (the dollars spent in buying goods and services to be currently consuined) or about rea consumption (the actual goods and services consumed), and similarly tx sometimes necessary to sate explicitly whether we are talking about money investment (che dollars spent in buying additions to stocks ofall kinds or aboat real investment (he actual additions tothe various stocks). But in most cases this is unnecessary, either because what ‘we have to say applies equally to both the real and the money flow (of consumption or of investment) or berate the context rakes it clear which we are talking about? Since all spending which is not for goods which ave currently consumed must be for goods which are not curently consumed, consumption and investment make up the whole of the low of spending. This toul can, however, be divided noe according to ‘what the money is spent on but according to who does the spend Ing. If we look at this we can divide all spending into spending by individuals, by businesses, and by the government, See appends to Chap 4 +See appendix to Chap. 4 0-8 EMPLOYMENT AND SPENDING 55 Busineses can invest but connot consume. Spending by business i never for consumption, because bu resis are not consumers. Only human beings can consume. The ‘owners of businesses are consumers, of course, as are the managers and workers employed by businases, a well ap the shareholders and creditors. These do spend on consumption most of the money Which they obuan from the businesses, but that consumption ‘counted in the spending by individuals and cannot be counted again inthe spending by busineses. The conteibution by bur ness tothe toal low of spending mist therefore consist endtely ~ Disinvestment must be subivacted from investment to show net Investment, we have seen, means buying goods that are not curcently consumed, Such putchates recalled investment cause anything that is bought and not currently consumed conmitutes an addition to stock, But most ofthe things bought by busineses 0 not remain in stack; they ae currently used up (or worn ont) jn dhe normal course ofthe busines. How can they then be com sidered investment? ‘When 3 business bays things and yet does not ad to its ck of capital goods, this i beeawse a the same time, in the course fof producing the goods or services that consituce is output, it ‘ues up (or wears out) the goods bought or other goods which it had in stock. Such a using up of materials, semifinihed goods, equipment, etc. is jut the opposite of investment and can be called “disinvestment.” Iti a subtraction from capital stocks just 2s investment isan addition to capital stocks, 1 the goods and services bought by the busines ae just sufi dent to balance the goods wsed wp, the investment and che disin- ‘vesument just cancel. The capital stocks are neither increased not56 EcoNoMICS oF ENPLOYMENT depleted and there i either net investment nor net disinestment the business buys more than enough to replace what is used up (Gacluding what is worn ov) then there isa addition to capital and there is that amount of net investment. On the ater hand, if the business uses up more than it buys for replacement, there isa net disinvestment measured by the exces of the disinvestment ‘over the investment. Individuals end the governsnent can both consume and invest While busineses an only invest nd disinvest, leaving Dalance ‘of net investment or net disinvestment, individuals can spend tither for consumption by themselves or their families oF for in vestment. Suietly speaking, mos of the expenditures by individ tals. on consumption, when ecamined micrescopically, look mach more like the expenditures by busineses. Many things are bought which are not intantancously consumed by the individual or by his family but which merely replace other things that are being ‘consumed out of previously existing socks, In other words, they are investment, being canceled by disinvestment for consumption. ‘When clohes oF furniture are being bought they replace others Which are being worn out. Even when the housewife buys a loaf ‘of bread, this isan addition 10 the houschold stock of capital Which i being canceled by the consumption during the day of some bread thae was bought yesterday. In the mater of groceries wwe can almost completely climinate the complication by con- sidering a week op a month instead of day, so that almost all of the bread bong in the period is actualy eaten in the same period. "To insis om distinguishing between newly bought bread which is added to capital and old bread which is eaten out of previously fequired capital bocomes rather pedantic. In the case of things like clothing or furniture the distineion is much more sensible, bout itis still not considered worth while, But in the cases of| howies or automobiles bought by individuals iis necesary consider the purchase ax investment and to count the act of EMPLOYMENT AND SPENDING 3 them up a8 dunvesment just at we do with busines purchases "The government, ike any individual, can spend money either on providing good aed services for current consumption by the population or on providing gon that are added tothe sock of ‘apt of the cctomy. Busines, however, a we have see, a spend money only on investment. This gives us five clement 3 tol money demand tor cursenly produced goods and ervce trhich conta the income ofthe economy and which determine the volume of employnent.The five cleans are consumption and investment by individ, consumption and investment by “the goverment an investment By business. Any fllemploy “Gaant policy tua inluence the volume oF spending in the econ omy asa whole, To do this it must operate on one or more of these fve clement Summary. "The volume of employment depends on the rate of spending, "This is uue for any moneyusing economy whether capitalist or socialse-whether it encourages or discourages or i neueal to the seeking of profits. Whether a worker finds a job depends on whether an employer ean sll the product at an adequate price. “Thus the number of workers that an employer will employ de- pends on how much of the product he can sll at an adequate price and therefore on how much is being spent in buying the prodact, ‘The total volume of employment thus depends on how much is being spent on currently produced goods and services throughout the economy. Te is important ro avoid confusion between the low of money spending and the stack of money in existence, only the former being significant direty for our purposes. The Bow of spending may be separited into spending for consumption and spending for investment and into spending by individuals, by business, and by the government. Businesses cannot spend for consumption ‘but can only invest (or disinve), There are, therefor, five cle58 ECONOMICS OF EMPLOYMENT ‘ments in the total spending ofthe economy: consumption and in ‘estment by individuals, consumption and investment by the gov femment, and investment by businestes. Any policy for full em ployment has to work on one or more of these five elements Uwhich anake up the total spending on currently produced goods and services. Arrrsarx to Cnavren 4 1. The relationship between the stock and the low ie Mstatd in| Fig. 1. The stock of water in the ank a ny point of tie is measured fon the sale that tes by the height ofthe water how many cubic feet sere ate inthe tak, The flow of water out of dhe tank is meas tuted by means ofthe meter which lls you how many exbie fet have {2op—- pased through the meter in the period that has claped since the Jas tte che meter wis read, ‘The tock refers to point in tine and is meanired simply ar 29 many cube fet, The ow alway refers to a period and is metined not asso many cubic fet, but as 50 many ‘bic fee per howr oF per month or other period 2, Figure 24 shows a sock of 120 billion dollars going round and round through the meter atthe rate of 240 bilon dollars per annum. "The flow through the meter in the course ofa year i ewice as great, asthe stack in the tank so that every dollar could pas through the Ineter twice if no dollar pawl through more than vice. The telecity of cteulaton fe por annum. Ia Fig. 28 there isthe same flow of 240 billion dollars per anmum going through he meter, EMPLOYMENT AND SPENDING 50 [eS E===100} 2 Fe 28, ‘but the sock is ony 80 bilion dolls All the money in the tank ‘ould pas through the meter dee times a year so tha he velocity of circulation 8 per annum 8 Inthe fast thre figures (and in odhers folowing) AV is repre sented bythe How through she mete. M i represented by he stock {of water or of money) in the tank Vi the number obtained by iv Jing the ow AEV by the stock Fe 4. Figure $ illustrates the division of the Bow of spending into eon- sumption and investnent ‘The lage How above represents conse tion and the small ow below represents investment, each of these fows being measured by i ova maze. The two Bows together ad up to the total of spending. '. Tes posible to imagine the Sow of real consumption and rat in ‘estment as moving through the une meters in the opposite dines tion tothe Bow of money payments, since the goad doin fact move0 CONOMICS OF EMPLOYMENT sos the counters i the direction opposite to that in which the Imaney pac, Iti, however, Best not to-do that beese thee i to comeponding tank in which the goods are held. ‘The money ‘0es round and round but the goods are mostly consumed as they sre produc. Some of the money may get worn out or otherwise Tow to the system (at represented by the leak in Fig) and his ean bbe made up by additional money being added (ar represented by the tap dipping into the tank). But most af the moacy ean be wi gin taps an pos oud ou wn he em many CHAPTER 5 Spending, Consumption, and Income’ ‘THE LEVEL of employment depends on the total rate of spend. ing andthe total rate of spending consists ofthe five elements dis tinguished in the lax chapter: consumption and investtent by dividuals, consumption and investment by the government, and investment by businesses. Any employment policy, therefore, must ‘operate by influencing one or more of thexe five clement. To be able wo work on them effectively we must know what are the main | orces which govern their magnitudes, (We are leaving until Pare VI the complications of international economic relations arising from the sending by ourselves on foreign products and the spend ing by foreigners on our product) ‘The five elements, as we have seen, fall imo ewo groups: com sumption and investment, Consumption may be undertaken by individuals or by the government, Investment, too, may be under- taken by individuals or by the government and may also be under taken by businesses, Spending depends on income. ‘Consumption by individuals is the largest of the fixe clements, 1c Gomes to more than llth oter four together. Kt magivude depends on many things. Individuals will consume more if they expect ther incomes to fereae, oF if they expect prices to rise, ori they belive tat the goods wil be unavailable later, oF i ies more fshionable to he seen consuming mor, of i they be lieve that what they do not consume will belt, and 30 0m. But {he mos important inflence that determines how mich people See the aot a he beginning of Chap.82 ECONOMICS OF EMPLOYMENT spend on consumption is hove much income they have. The lange ‘2 man’s income the more he will consume, ie, spend on com sumption, “There are ofcourse, some individual with large incomes who consume very litle and there are other individuals with smaller incomes who consume such more. But itis still tue that both kinds of people as well a al those of intermediate temperament ‘would cansume more dhan they do if their incomes were greater than they are and would consume less than they do if their in comes were smaller. Their response toa change in income may be very large or very small and it may be very rapid ot very sow, but itis dificult to think of anyone who would consume les just ‘because his income i lager or who Would consume more because his income is smaller. For diferent people there will be diffrent relationships between their income and their consumption, but {or all of them the elaionship wil be positive larger income result in larger consumption in one degree or another. “The relationship between any individual's income and his con sumption is called his propensity to consume. If we know his in ‘come and his propensity to consume we can figure out his con- ‘sumption. His propensity to consume i the formula or the table whieh enables us to calculate the corresponding, consumption for every income that he might have "There is also a propensity to consume for a group of people or forall the people in a country. Ie depends on the propensities to consume of the individuals in the group or the nation, on hhow the income is divided among the individuals, and on how ‘uch i consumed by the government. I we know the propensity to consume of ay society, we can gure out its consumption from its income in the ste way a we can figure out the consumption ‘of any individual from his income and his propensity consume. 1, for example, the propensity w consume of the mation is % (Qo take an oversimplified example in which the proportion re- Inains the same for different levels of income), Wen an income ‘of 240 billion dollary would result in 200 billion dollars being SPENDING, CONSUMPTION, AND INCOME 63 spent on consumption goods and services, and out of an income of 246 billion dollars 205 billion dollars would be consurned. Income is earned by selling services. “The propensity to consume directs our search from consump. tion to income: Knowing the propensity to consume we now need to know the income in order to be able ta find out how such val be consumed, Any individual's income is what he earns. He may extn income by working, in which case his income consist of what ie paid for his work, (Atleast that isthe case if he is himself the ovmer (of his own labor power and is nota slave. What is paid for the ‘work of a slave constitutes income not for the slave but for the owner of the slave) ‘An individual may also earn income from the ownership of property of the kinds which (unlike slaves) are now legally per smiwed-land or machines oF houses or money. The payment for the services of any piece of property constitutes income for the lowner of the property just as the payment for work done com states income fr the free worker who owns his own labor power: “There i no moral implication in the concept of earning income by work. Ie fequenty assumed that income obtained by the sale of labor power is better justified morally than income ob tained by the sale of the services of ather kinds of property. This isnot necessarily the ease, Income from the sale of some specialized ind of labor involving skills from which outsiders are barred jn one way or another may result in very high incomes that re fect «special and unjust privilege much more than some incomes from the sale ofthe services of property. The relatively high in come earned by one who is lucky enough to become a member of say, the New York Scene Shifters Union is certainly not easier justify morally than the income obtained from the renting of a house belonging to a retired worker who has built it wich his wn hands. But in any case we are not concerned here with theot kcoNostics OF ENPLOYMENT ‘moral implications and so need not distinguish between income ‘which is morally justified and income which isthe result of a special and unjustified privilege unfairly held at the expense of thers, We need not inquire whether such unfairness i connected with the distinction Between income earned by work and income catned by property. "The earning of income is thus identical with the selling of services of goods incorporating such services. But nothing ean be sold unless there is somebody who spends money in buying what i Being sold. The caring of income is itself dependent ‘on spending ‘Here we seem to be back where we started. It was in order to find out what determines the total of spending that we divided i into the five diferent kinds of spending of which the frst and the gest was the consumption of individuals. Now we find thae this item itself depends on income and thas on spending Income is equal to spending “The relationship between income and spending is vealy much clover than mere dependence. The income earned in any period of time i always exactly equal tothe spending in that period of time, Income must be exactly equal to spending simply because the two words refer to the sme thing looked at from different points of view. Every receipt of a dolla of income is also the Dutlay of a dollar of spending. Which we call it depends only fon whether we ate looking a it from the point of view of the enon receiving the dollar oF whether we are looking at it from 1 point of view ofthe person paying ovt the dollar. The equality thus turns out to be a sometat disguised form of saying that ‘the total sum of dollar payments (looked at from the front) i ‘equal to the total suin of dollar payments looked at from be hind). "This kind of proposition is diftele to dispute? See append to Chap, 5s SPENDING, CONSUMPTION, AND INCOME 65 “The equality between income earned and money spent is one ‘of the mest fundamental propositions in the cheory of the deter ‘mination of income and employment. A flute to recognize the ‘squaity oF a supposition of the possibility of even a momentary inequality between them involves error and contradiction and ‘completely destroys any arguments that permit ie “This may sena rather strange because the equality beeween| income and speiing i one of thote unconditional and inevitable ‘equalities that are sometimes called identities or tautologies. Te ‘toes ot teally make any statement about the actual world in the sense that it tell something about it which we might have sup poved to be otherwise. But although the equality or identity of pending and income does aot give us any information about the actual word, i is extremely useful in checking on arguments which da purport to tll us something about the actual worl. TE Wy argument should imply that income was greater or smaller than spending, even if only forthe smallest period or only by the smallest amount, then that argument is no good. What it ties to show ss may sil be tae, but an argument which either ex plicty or inplicily assumes an inequality between income and spending is disqualified as thoroughly and in exacly the same way ar if it depended on assuming somewhere in the course of the argument that 2 and 2aze equal to 17 “The equality bewwoen spending and income does not apply to any individual or to any group of individuals constituting tess than the whole ofthe economy. We ae talking about a free coun: try in which anyone can spend less chan his income if he wishes te and can spend more tha his income i he has any other source of cash o ret. The equality isnot between anyone's income and his own spending, Ie is between anyone's spending andthe income that someone ele cars because of this spending, I is therefore only when we include everybody in the community without ex feption that every dollar counted in spending is also counted in {Income earned and vice vest 40 thatthe sum of all the spending comes to exactly the sae asthe sum of all the income earned.66 ECONOMICS OF EMPLOYMENT ‘The necessary equality between spending and income holds only for the economy as a whole. Onty spending on currently froduced goods and services ereater In applying the identity we mus, however, be careful to count only such spending a5 is directed to buying currently produced ood and services, for itis omly the sale of currenty produced goods and services which constitutes income to the seller. I I sell you my house for $10,000, that $10,000 docs not constitute any part of my income. I have not camed the $10,000. 1 have merely received it in exchange for the house which I previously posesed. If T spend any part of that money on conssmption, 1 shall be eating up a part of my capital IFT spend none of the ‘money on consumption but keep all of i, I shall not be adding anything to my capital All that has happened is a swap between us Delore the exchange you had the money and I had the house Nov, after the exchange, you have the house and T have the ‘money. Your buying has been canceled by my selling (which must be counted as negative buying). No income has been created. Ic might be thought that this tries to prove too much, Does not every purchase imply a sale? Would not that prove that no income is ever created by anybody's buying anything? Is it not always true that if buys from B, B must be selling to A, s0 that there is a similar canceling out and no income is ever created? ‘The argument doesnot ty to prove too much. If Lam a house builder and currently produce the houses [sell 1 ar the money 1 get for them and i i part of my income. 1 am not impover- ished by consuming i, and if 1 save any of this money it will