Subscribe to BrookesNews’ Bulletin
US economy, production and jobs
Gerard Jackson
Some readers have asked if there is a conflict among Austrians over what happened to the US economy and current economic trends. One reader even referred to an apparent contradiction between Friedrich von Hayek and Murray Rothbard on the unemployment question and recession.
Now Hayek believed that once the business cycle entered its final phase and consumer goods started to rise relatively faster than producer goods involuntary unemployment in the producer goods industries would emerge. Rothbard, who had enormous respect for Hayek, argued that this would not necessarily be the case. So who was right and should it affect our views on what is happening to the American economy?
These are two very important questions when one considers the recent recession and current trends in the US economy. What Hayek argued is basically what Brookes continues to argue. When the banks cease lending consumer demand will continue to rise for a time even though spending on producer goods is falling.
The relative increase in the demand for consumer goods results in their price spreads exceeding those in the higher stages, which would be narrowing anyway. This means that the prices of factors in the higher stages will rise as they are bid away by firms closer to the point of consumption. This in turn will aggravate the downward pressure on price margins in the higher stages of production.
The relative rise in factor prices in the higher stages will render the longer processes unprofitable. Now any economist will realise from this line of reasoning that specific factors will be hit the hardest by this process, meaning that excess capacity will start emerging (some might say that factory utilisation is falling), and that the prices of these factors will start to fall, at least in relative terms.
Eventually, the accumulative fall (relative or absolute) in the prices of intermediate goods will bring about a severe contraction in the higher stages of production. This was certainly the case with the recent recession. Hayek deduced from this that many workers who were employed in the higher stages of production would be unable to find immediate employment in the shorter stages (those close to the point of consumption) despite the fact that these stage will have expanded.
Rothbard’s response was brief and pointed. Although he accepted Hayek’s reasoning he argued that the transition period during which the economy moves from longer production processes to shorter processes shouldn’t necessarily mean that significant unemployment will emerge. So long as the redundant workers are prepared to work at any wage rates that are offered unemployment would not be a problem.
Now all of this has a direct bearing on what happened to the US economy. But before we leave the realm of economic theory we should note that the question of unemployment as Hayek and Rothbard deal with it hinges on time and flexibility. If workers are prepared to accept significantly lower wage rates then high rates of unemployment will be averted. On the other hand, if the slowdown is very quick then it might take some time to absorb the unemployed workers into other lines of production.
Now in his discussion Hayek did say “a fairly sudden stoppage of work”. In that case he would, I believe, be right about the unemployment effects. But he was discussing a situation where monetary expansion had completely ceased. Were the contraction to occur more slowly then the resulting unemployed would be more easily absorbed into shorter stages of production, whether they were complete or not, assuming a fair degree of wage flexibility existed.
This would explain why America’s unemployment rate remained quite low even though manufacturing employment was falling. Therefore I’m inclined to go with Rothbard on this one. In any case, I think Hayek tacitly conceded this point in his paper Profits, Interest and Investment.
What certainly needs to be stressed is that there is no significant difference between Hayek and Rothbard on the nature of the business cycle and what needs to be done.
Note: See Prices and Production by Friedrich A. von Hayek.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 18 July 2005