Involuntary Unemployment.

Economics Economics Questions
61

But my point is that one doesn’t have to engage in exchange in order to realize a profit from action. It can be very profitable psychologically to subsistence farm.

Yes, sure. It’s just that generally in AE, “profit” means “the positive money return for bearing uncertainty”, while the more general sense of benefit is termed “psychic profit”.

But can we agree that leisure is not a unique category of action vs. labor? If one plays football for a wage, or one plays football for fun, one is still performing the same action.

It’s actually important to distinguish the two categories in just that way, for the means-ends framework of economics to make sense. Playing football for fun is a consumers’ good. Insofar as a football player accepts a lower wage, because playing is fun, than he otherwise would accept, his playing is a consumers’ good too. But insofar as he plays for a wage, and insofar as the market awards him that wage by virtue of the entertainment value he provides to consumers, his playing is a factor of production.

62

I am invoking praxeology, of which catallactics is a more narrow sub field. It may be that you and Liliburne are invoking catallactics.

63

Yes, exactly.

64

It’s just that, Jonathan’s whole argument, which we are challenging, centers around disequilibrium in labor markets, which means it’s fundamentally a catallactic issue.

65

So we don’t have to go in circles, would you please clarify that AE cannot be in conflict with praxeology?

If we define our terms to match our conclusions …

Let’s see if I follow your explanation. If he gets a lower wage because he wants to win, and give the team enough money to sign other players, or take less money to play in a particular city, you are saying that is fun and consumptive. But if he takes the maximum amount of money possible regardless of his happiness (and perhaps much to his unhappiness by some standards) then he is really laboring now.

This doesn’t make any sense to me.

Correct me if I am wrong, but it seems to me that you’re claiming that labor profit can only be manifest in the exchange of money and is not measured in psychological satisfaction. This seems entirely at odds with praxeology where man acts for his psychological realization of benefit.

66

I thought Vichy was challenging the idea that self-employment was not employment.

67

I thought Vichy was challenging the idea that self-employment was not employment.

No, earlier I criticized Jon precisely because his view seemed to entail that.

68

So we don’t have to go in circles, would you please clarify that AE cannot be in conflict with praxeology?

Yes, that is true.

If he gets a lower wage because he wants to win, and give the team enough money to sign other players, or take less money to play in a particular city, you are saying that is fun and consumptive. But if he takes the maximum amount of money possible regardless of his happiness (and perhaps much to his unhappiness by some standards) then he is really laboring now.

In the former case, it’s a mix of both labor and leisure. In my explanation, a crucial word is “insofar”.

profit can only be manifest in the exchange of money and is not measured in psychological satisfaction.

That is how profit (as opposed to psychic profit) is defined.

This seems entirely at odds with praxeology where man acts for his psychological realization of benefit.

How so?

69

This ^^ model doesn’t fit people who take less money to do work they enjoy more.

Again, in those cases, it’s a mix of labor and consumption.

I believe monetary exchange is also a psychological phenomenon. Our concept of profit doesn’t exist absent our minds.

Yes, but money profit is an important, distinct phenomenon, because without it economic calculation would be impossible.

70

I need to go back and read that bit.

71

What Austrian defines it in that way?

A man that prefers a lower wage job for a shorter commute as oppose to a higher wage and a longer commute, does not mix labor with consumption.

The times required for commute (or his dislike of driving) are valued differently on his value scale. He values the benefit of the job according to the total psychic profit he expects to earn in which monetary profit is just a subcomponent of. At the end, all profit is psychic (including monetary profit).

I would say that you are wrong in separating the two. That catallactics cannot account for the pure psycic profit but only for its monetary component does not make some part of labor consumption.

72

asymmetric information… this is the answer of neoclassical economists to “involuntary unemployment”.
It’s because employees are overpaid.

http://en.wikipedia.org/wiki/Efficiency_wages
“Equilibrium then entails unemployment, because in order to create an opportunity cost to shirking, firms try to raise their wages above the market average (so that sacked workers face a probabilistic loss). But since all firms do this the market wage itself is pushed up, and the result is that wages are raised above market-clearing, creating involuntary unemployment. This creates a low, or no income alternative which makes job loss costly, and serves as a worker discipline device. Unemployed workers cannot bid for jobs by offering to work at lower wages, since if hired, it would be in the worker’s interest to shirk on the job, and he has no credible way of promising not to do so.”

“The shirking model does not predict (counterfactually) that the bulk of the unemployed at any one time are those who are fired for shirking, because if the threat associated with being fired is effective, little or no shirking and sacking will occur. Instead the unemployed will consist of a (rotating) pool of individuals who have quit for personal reasons, are new entrants to the labour market, or who have been laid off for other reasons. Pareto optimality, with costly monitoring, will entail some unemployment, since unemployment plays a socially valuable role in creating work incentives. But the equilibrium unemployment rate will not be Pareto optimal, since firms do not take into account the social cost of the unemployment they help to create.”

73

William Hutt. And Rothbard notes that Hutt’s formulation works, although he himself does not adopt that definition of consumption.

I agree that monetary profit is a subcomponent of psychic profit. But it is right to DISTINGUISH between the two by recognizing that they are different concepts. Even though the former is part of the latter, it is not true that the former IS the latter.

It’s all about functional analysis. We accept that the same person may person may earn profit and interest as an entrepreneur-capitalist, and pay himself an implicit management wage. Why then can we not accept that the same person may earn profit and wages as an entrepreneur-laborer, and “consume” part of this potential earnings by giving up a certain amount in favor of certain enjoyments?

I know this isn’t Mises’ approach, but Hutt’s characterization of consumption makes sense to me.

74

Lilburne,

Again, there’s no such thing as negative wages. A self-employed man is also a self-employING man. Any loss incurred by a self-employed man is incurred by the man qua capitalist-employer

I’m not sure what your point is.

Nobody’s defining away unemployment. Any person who is not actively seeking money for his labor is unemployed. It just so happens to be that in an unhampered market in which labor is more scarce than land and capital, such a person is unemployed voluntarily.

Lilburne, labor is scarce is a hampered and unhampered market alike. Labor is scarce in a market suffering from a business cycle. How do you define involuntary unemployment, then? Like I said, technically speaking, the thousands currently cyclically unemployed (traditionally considered involuntarily unemployed) are voluntarily unemployed according to the logic expressed on this thread. They could all just arbitrarily apply their labor to something random and become employed.

75

Again, there’s no such thing as negative wages. A self-employed man is also a self-employING man. Any loss incurred by a self-employed man is incurred by the man qua capitalist-employer

I’m not sure what your point is.

My point is, your notion of a “laborer’s losses” is erroneous.

Nobody’s defining away unemployment. Any person who is not actively seeking money for his labor is unemployed. It just so happens to be that in an unhampered market in which labor is more scarce than land and capital, such a person is unemployed voluntarily.

Lilburne, labor is scarce is a hampered and unhampered market alike.

The issue isn’t whether labor is scarce. The issue is whether labor is more scarce than land and capital.

They could all just arbitrarily apply their labor to something random and become employed.

No, if they have no capital with which to employ themselves, and if minimum wage laws prevent those with capital from employing them, then they are involuntarily unemployed.

76

Grayson,

First of all, I only quoted it once in this thread. Secondly, I will quote it as much as I deem it serviceable to in this discussion. You made a claim about what Mises would disagree with which I believe was directly controverted by the passage I quoted.

Actually, no it wasn’t. I said that Mises agreed that involuntary unemployment was possible in a hampered market. The quote you provide, by Mises, says the same thing. What is occuring in this thread is an attempt to define away involuntary unemployment altogether (because, any person can be self-employed).

Why does your conclusion follow from your premise?

If markets are never in equilibrium because of shifting demand and supply, and therefore it follows that the labor market is in constant disequilibrium (again, not necessarily at a point where there will be involuntary unemployment), then it also follows that it is possible for there to be involuntary unemployment. In this case, wages may be higher than the clearing price. Jesús Huerta de Soto also argues that in any market there is imperfect information, so there is the probability of an individual not knowing that there is an employer willing to offer him a wage.

You missed the “by that reasoning” part. I’m not saying you made that proposition. I’m saying that your line of reasoning regarding labor, if consistently applied, would result in that obviously untenable proposition regarding investment.

But, my line of reasoning doesn’t lead to that conclusion, at all.

If that person really thought that, then yes he is a (really bad) entrepreneur-laborer. Just as someone who erroneously invested in garden-hole-digging business is a (really bad) entrepreneur-capitalist.

But, the argument being proposed in this thread (not necessarily by you) is that given the fact that anybody can become self-employed by applying his labor to something, there is no such thing as involuntary unemployment. Even if the individual knows that a particular investment of his time and labor will not be fruitful, the fact that he chooses not to employ himself in this manner is voluntary.

For a laborer to find an entrepreneur they’d be delighted to work for, generally involves speculative waiting. But speculative waiting is still voluntary, and is chosen willfully, in an unhampered market, over the option of working, even if at a very low wage, for the first entrepreneur-capitalist he finds (even if that entrepreneur-capitalist is himself), even if he’s NOT delighted to work for that person.

What if he doesn’t immediately find someone willing to offer him a wage, maybe due to geographical issues (no open position near him, so he has to go out farther and look, and this takes time)? And, what if the only possibility for self-employment causes a net loss in accumulated wealth? Is he still only voluntarily unemployed?

77

My point is, your notion of a “laborer’s losses” is erroneous.

I never said a wage-earner could incur negative wages. I said his wages may not exceed his costs.

The issue isn’t whether labor is scarce. The issue is whether labor is more scarce than land and capital.

As Reisman argues in Capitalism, what makes land and capital scarce is the scarcity of labor. There is, practically speaking, unlimited capital and land. What makes these scarce is the fact that labor, the factor that transforms unused land and capital into economic goods, is scarce.

No, if they have no capital with which to employ themselves…

To one degree or another, everyone has sufficient capital to do something. Indeed, homeless people have sufficient capital to steal/buy/take from a dumpster rag and use it to clean people’s automobile windows.

EDIT:

This is not only addressed to you Grayson, but to all. These are my thoughts on the unemployment question,

To what degree is it practical to talk about self-employment as a form of employment? How broad is the word employment, in terms of the global population as a whole? My point is, while it may be technically true that an autarkic individual is employed within his own economy, practically speaking when economists are talking about employment they are talking about employment within a certain economy.

What I mean is that an autarkic individual no longer forms part of the division of labor of the greater economy, and so technically speaking does not form part of the labor force in general (so, for all intents and purposes, he is not unemployed nor employed; he is simply not part of the labor force). So, when talking about employment (whether it is as a wage-earner or as an entrepreneur), we are talking about individuals employed within a certain division of labor (a certain economy). If an individual becomes autarkic, he is no longer a part of that division of labor (an individual participating in a division of labor is one who specializes on very few things, and allows the greater portion of his desires to be fulfilled by others).

So, a debate on employment versus unemployment concentrates on a division of labor economy, where the unemployed are assumed to be individuals who are not earning a wage or gross profits while still looking to be part of that division of labor.

78

Jonathan,

I have to get to work, so I’ll respond to your latest posts later. For now I leave you this quotation by Arthur Latham Perry, cited favorably by Rothbard in MES:

“Every man who puts forth an effort to satisfy the desire of another, with the expectation of a return, is… a Producer”

People are active laborers (producers with regard to human energy) by virtue of striving after returns, not necessarily succeeding in acquiring returns.

79

People are active laborers (producers with regard to human energy) by virtue of striving after returns, not necessarily succeeding in acquiring returns.

I agree. I concede that I am wrong about non-profitable labor not being employed labor. That is why I revised my position after thinking about it last night to one which my reflects my views more accurately - one that revolves around the division of labor (which is what Rothbard is also talking about).

80

I don’t know whether this may be helpful or miss the mark. I glanced through the posts and didn’t see this idea clearly expressed, so here goes:

I’ll refer to Hoppe’s passage in Economic Science and the Austrian Method, page 15:

“Whenever minimum wage laws are enforced that require wages to be higher than existing market wages, involuntary unemployment will result.”

We imagine an employer who employs an employee at a given wage.

We imagine a minimum legal wage that is continually increasing. First, the minimum legal wage (MLW) increases by some percentage such as 10%. Then the MLW doubles, then triples, then continues to increase exponentially.

I assume we mean that this MLW is increasing relative to the income of the employer. We don’t assume that his income remains proportional to the increase in the MLW.

Under these assumptions, eventually the MLW comes to represent such a large expense for the employer that it dwarfs all his other expenses. Eventually, the MLW is a larger expense than his rent, business expenses, inventory expenses, and living expenses, combined. For illustrative purposes, let’s just assume a minimum legal wage of $10,000 per hour.

If the employer continues to pay the MLW to the employee under these circumstances, then unemployment hasn’t occurred.

If the employer is “forced” to release the employee at some point due to the rising or raised MLW, we might say that “involuntary unemployment” has occurred.

As I understand it, this way of approaching the problem entails two further notions:

  1. The market wage rate is defined as the rate that the employer is willing to pay the employee. When the employer releases the employee because his wages are too high in the estimation of the employer, this means that by definition, this wage is higher than the market rate, because the market rate is “demonstrated” as the rate the employer is willing to pay. The market wage rate in this conception is not an aggregate.

Any aggregation that is done, is done as a means of interpreting “market phenomena” (i.e., aggregate phenomena), on the basis of a prior conception of the market rate based on the logic of individual action.

In other words, if we say that Y accompanies X in individual action, and if we conceive that there are a bunch of individuals for whom X is occurring, then we also conceive that there are a bunch of individuals for whom Y is occurring.

  1. When we refer to the idea of “involuntary” unemployment, we are introducing an ethical term of intersubjective social interaction.

Here is at least a first attempt at an explanation why this notion of “involuntary unemployment” leads to problems:

If we are trying to say that the “cause” of the MLW rising to the point at which the employer releases the employee is another person P, a person who “forces” the employer E to pay a higher wage, and we are trying to say that this is why the unemployment is involuntary rather than voluntary, then we may, under this reasoning, be forced to introduce the concept of “involuntary employment” to designate the MLW that E pays his employee.

That is, when the MLW is paid by E, before the wage rises to the point where he releases the employee, this wage too is “forced” upon E by P.

P is also the “cause” of this wage.

E is paying his employee $3 per hour. P introduces a MLW of $3.01. E pays this wage to his employee.

This is then “involuntary employment,” since the employee is still employed, and P has “forced” this wage on E “involuntarily.”

At this point, the purpose of the voluntary/involuntary distinction starts to break down.

Again, this is just a first attempt at an explanation why the attempt to introduce an intersubjective or ethical notion into the chain of reasoning leads to problems.

The essential problem is that the terms voluntary/involuntary refer to “political action” or “ethical action” (direct social interaction) and economics or catallactics is not constructed from the beginning so as to incorporate these conceptions seamlessly. Catallactics or economics are also not constructed to deal with phenomena such as “mental action” or “psychological action.” (actions such as thinking, reasoning, hoping, wishing, etc.)

When we try to incorporate ethical acts such as P “forcing” E into our catallactic/economic analysis of the market wage rate, we will inevitably run into problems to the extent that catallactics or economics are not constructed to deal with ethical or political actions.