[This is Chapter Seven of Murphey’s book The Emerging Crisis of Economic Displacement

[This is Chapter Seven of Murphey’s book The Emerging Crisis of Economic Displacement.]

Chapter Seven

THE MARGINALIZING OF EMPLOYMENT

The core of the factual case:

What is agreed to by free-market economists

We saw in Chapter 5 how today's economic statistics fail to convey an adequate picture of what is happening. In the coming chapters we will see economists taking diametrically opposite views about important specifics. This makes the empirical case less dependable than I would like it to be as the basis for analysis. I am not a statistician and can't purport to resolve the conflicts by my own expertise. In the absence of an unquestioned statistical case, it may be argued that all the specifics just cited are merely "anecdotal," not necessarily representative of the larger picture. Because of this, even though the empirical evidence can be of some weight, a more incontestible foundation will come from two sources: the many points upon which economists of all persuasions, including those who most hold to free trade and a market system, agree about the displacement and polarization; and the indications that economic theory provides, especially when it is consistent with the empirical evidence.

In what follows, I will give the points about displacement as taken from the statements of leading free-market economists, knowing that others make the points even more emphatically. They will accordingly be points about which there is a consensus among economists of varied persuasions.

I should mention that many of the statements are "out of context" in the sense that the author will have made the point within a defense of how the competitive market is working. Just the same, the point in each case is one that has been said by the respective economist to be true and is an important one to us here. It isn't particularly relevant that I am seeing the point as significant in a context the economist didn't intend. An example is the recognition by a good friend of mine, William Allen of UCLA, quoted below, that there has been a decline in the growth of real wages since the early 1970s. That recognition is important to my analysis. But his explanation of the cause is a different point and one that I won't embrace. As the fine economist that he is, he gives what is in effect a textbook explanation: that wages are tied to the rate of return on capital, and that productivity (and hence rate of return) has slacked off because of "fewer new tools and technology."[1] But in light of everything we have seen showing an exponential growth of technology, we have reason to doubt whether a slackening of technology can possibly be the explanation. This leads me to present his factual point about the decline in wage growth without paying particular attention to the context in which he mentions it. In later chapters, we will examine the conceptual issues and relationships of cause and effect.

Here are the points:

About the displacement of workers

1. That a displacement of workers from the industrial sector has been occurring:

. William A. Niskanen was a member and acting chairman of the President's Council of Economic Advisers under President Reagan and is chairman of the libertarian Cato Institute. He says "the share of total employment in the goods-producing industries has been declining for more than thirty years."[2]

. Michael Boskin was chairman of the President's Council of Economic Advisers under President Bush. He points out that 2 million jobs were lost in American industry between 1979-86, and says "this decline in industrial employment occurred worldwide in advanced economies."[3]

. Bryon Higgins is an economist and in 1994 vice-president of the Federal Reserve Bank of Kansas City. In the summary he wrote for the Federal Reserve's Jackson Hole symposium in 1994, he said: "There is a disturbing trend in many industrialized countries toward long-term unemployment, especially among low-skilled workers. This trend has had less effect on measured unemployment in the United States than in Europe in part because U.S. workers have greater incentives to accept low-wage jobs. Nonetheless, virtually all industrial countries face a jobs problem that impairs living standards and threatens a breakdown in social cohesion."[4]

. Murray Weidenbaum is the Mallinckrodt Distinguished University Professor at Washington University in St. Louis. He is widely known as an economist who supports the free market. He writes: "During the first six months of 1994, publicly announced company downsizings were at a record high and that phenomenon shows no signs of ebbing. For many American workers, this means that the American dream has been shattered."[5]

2. That a major shift has occurred into service employment:

. Edwin S. Rubenstein is the author of a regular column on economic statistics called "The Right Data" for the conservative National Review magazine. He confirms that "as industry learns to produce more with fewer workers, more of the labor force is absorbed into service jobs... Service employment has therefore grown rapidly, while industrial workers account for an ever-smaller share of the U.S. labor force." The shift is occurring, he says, even more rapidly outside the United States.[6]

3. That low-skill workers have been faring badly:

. Niskanen says "the major problem is for workers with low skills; for these workers, employment declined in the goods industries, and average real earnings declined in the service industries."[7]

4. That discouraged workers have been abandoning the workforce:

. Writing in Jobs & Capital published by the Milken Institute, Shirley Svorny and Charles Kaljian argue a statistical case against displacement's occurring. Nevertheless, they say that "it is clear that low-skilled workers are doing relatively poorly. Not surprisingly, discouraged workers have abandoned the labor force, thereby reducing labor-force participation rates among the least skilled." They also cite a study that shows that the number of people permanently dismissed, as distinguished from those who are just temporarily laid off, has increased from 33 percent of the unemployed in 1968 to 41 percent in 1993.[8]

5. That the displacement is caused in part by technology:

. Richard M. Ebeling and Jacob G. Hornberger are the editors of and contributors to The Case for Free Trade and Open Immigration published by the strongly pro-free-market Future of Freedom Foundation. They say: "It is possible that if enough people buy the imported version of a product, the workers making the domestic version could lose their jobs. (Although that is not what has happened in the apparel industry, where technology, not imports, has eliminated jobs.)"[9]

6. That the displacement is caused in part by foreign low-pay competition:

. Brian Boland and Walter Block are authors of "The Benefits of Outsourcing" in the January 1997 issue of the pro-market The Freeman. Professor Block is an economist at the College of the Holy Cross, Boland apparently one of his students. Although they are discussing the effects of a company's "outsourcing" (buying components or services from other companies rather than making or providing them itself) without specifying that it would involve going to a source in another country, their point has a logic that applies equally well to overseas purchases. They say that "purchasing services from others does weaken dependency on the current staff... If the trend continues, the classic workforce will be slowly rendered obsolete."[10]

7. That worker insecurity is a major fact:

. Alan Greenspan, the chairman of the Federal Reserve Board, is strongly pro-free market and was once closely associated with individualist philosopher Ayn Rand. In his 1996 testimony on monetary policy objectives, he said that workers are "less willing to test the waters of job change," so that "voluntary job leaving to seek other employment appears to be quite subdued despite evidence of a tight labor market." This is because "workers are more worried about their own job security and their marketability if forced to change jobs."[11]

About the resulting polarization of income and wealth:

8. That there has been a long-term decline in the growth of real wages for the bottom half of the population:

. Free-market economist Milton Friedman, a Nobel prize winner, acknowledges "the decline in the relative wage of low-skilled workers in the United States," which he says "started several decades ago." He says the rising technology and poor education have been more important in causing this than the competition of foreign labor.[12]

. I referred above to William R. Allen, who is an economist at UCLA and is widely known as the "Midnight Economist" (so named because of his late-night radio commentary). Allen publishes many essays as a staunchly pro-market economist. It is significant that he acknowledges a "decline in growth in real wages" over much of the past 25 years.[13]

. Many of the statistics that Rubenstein cites are given to demonstrate that the economy has been doing better than its critics say. Just the same, he reaches important conclusions that support the thesis of displacement and polarization. He says "accumulating research shows that changes in the labor market have resulted in higher wages for college graduates and depressed wages for young men with lower levels of schooling...This trend occurred not only in the United States, but internationally."[14] He explains that "there is no question that there has been a stubbornly large increase of people with very low incomes" (although he ascribes mitigating and explanatory factors).[15] He speaks of a "universal increase in income disparity" and says "the income gap between rich and poor is greater now than ever."[16]

. Boskin, in his 1989 book, said "real per capita income, a rough measure of the standard of living of the average person, had grown only about half as much per annum since the late 1960s as in the twenty preceding years... [O]ther advanced countries also experienced the long-term slowdown."[17]

. Niskanen in 1988 said that "the major problem is for workers with low skill; for these workers, employment declined in the goods industries, and average real earnings declined in the service industries."[18]

9. That economic theory would, under the circumstances, predict a polarization:

. Melvyn Krauss, a senior fellow at the Hoover Institution and emeritus professor of economics at New York University, is the author of the 1997 book How Nations Grow Rich: The Case for Free Trade. Although his argument is to the effect that "trade should not be restricted just because it causes income to be redistributed," here is something to note: "Trade has widened the gap between the real wages of French skilled and unskilled labor (the same is true in other advanced industrial economies as well). ‘A widening gap between the skilled and unskilled is exactly what economic theory would predict,' writes the Economist magazine."[19]

10. That open trade with low-wage countries will lower wages in the advanced economies:

. Krauss is all for NAFTA (the North American Free Trade Agreement), but he does say that "one U.S. group likely to lose from the trade agreement is unskilled labor... The resultant unemployment of unskilled workers can be mitigated only if their wages are reduced." He adds that "the wages of unskilled workers in Mexico will be bid up." This is "wage convergence."[20] Although Krauss is talking about trade with Mexico, his point holds good for trade with all low-wage countries and there is no reason that it should not apply to low-wage foreign skilled labor as much as to the unskilled.

. Pro-free trade economist Paul Krugman, writing in the Harvard Business Review, says "increased trade with the Third World, then, while it may have little effect on the overall level of First World wages, should in principle lead to greater inequality in those wages, with a higher premium for skill. Equally, there should be a tendency toward...wages of low-skilled workers in the North declining toward Southern levels." This is an important confirmation of displacement and polarization even though in saying this Krugman overlooks a significant fact: the competition that low-pay, high-skilled Third World workers are giving to high-skilled workers in the advanced economies.

11. That immigration from low-wage countries lowers wages in the advanced economies:

. Rubenstein reports that "within the United States... a huge wave of immigration has reduced the wages of low-skilled workers."[21]

12. That an income gap exists and is widening:

. Probably the most significant description of what is happening comes from Hans Sennholz at the Foundation for Economic Education, publisher of The Freeman and over a span of many years a leading champion of the free market. His column in September 1996 said that "no matter how you may gather the data, the gap between the most affluent Americans and everyone else is widening. According to a Census Bureau report, the share of national income going to the top 20 percent of households increased from 40.5 percent to 46.9 percent between 1968 and 1994. Since 1994 the trend has even accelerated. At the present rate of growth, the top 20 percent of households may soon earn more than one-half of national income." Further: "While real hourly wages have fallen since the mid-1970s and many high-paying jobs in manufacturing have disappeared, stock market investors have reaped extraordinary profits. The lion's share of these profits obviously went to the top 20 percent of households."[22]

. There is no more optimistic free trade economist than Christopher Farrell, an economics editor for Business Week, unless it is Julian Simon or Hans Sennholz. And yet, in a column in early 1995 Farrell acknowledged that "there is no more troubling economic phenomenon than the rise of income inequality in America over the past 20 years...."[23]

Marginalizing and polarizing as a possible alternative to

ultimate displacement in the advanced economies

At this point I need to revisit something that I explained in the Introduction. Economic theory tells us that unless there are wage rigidities inhibiting a lowering of wages, the level of wages will always be such as to "clear the market" of everyone who wants to work. That is the nature of the price-system that is central to the market: that prices will always tend toward the level at which buyers and sellers get together and the entire supply will be sold. This applies to work offered in the labor market as well as to the supply of herrings sold by fishermen. This informs us, then, that if things are left to work themselves out freely there will be no "ultimate" (i.e., long-term) displacement of those wishing to work. It is recognized that "frictional" (i.e., temporary) displacement can exist while people relocate, retrain, or otherwise adjust to market demand. Of course, we know that there has indeed been "unemployment" at many times and places; but that is due to wage rigidities that violate the rationale of the market, or to monetary dislocations which are temporary in nature.

As we advance into non-labor-intensive goods and services, I am convinced that this line of reasoning simply doesn't fit what will happen in the less-developed economies. Those are the economies lacking the capital and technology to provide a continuing engine of economic productivity. How low would wages have to fall to keep everybody occupied out of the relative dribble of economic activity such an economy can produce? An answer, of course, is that if wages fall below subsistence, part of the population will disappear, either by the death of persons already living, their emigration to the countries with advanced economies, or the non-birth or infant mortality of future generations. That is an answer that maintains the neat symmetry of the theory and is correct so far as it goes. But only so far.

This is not the chapter in which I wish to discuss the issues of values and policy that all of this suggests. For now, it is enough merely to state such a scenario to demonstrate how unsatisfactory it will be. Not only will it have effects so inhumane as to be unthinkable (or that we should choose to consider unthinkable); it will produce so much desperation, envy and hatred that it will ineluctably lead to endless war and mass migration. The very existence of civilization will be put at risk if we accept economic theory as a normative guide to how things should work for such societies. If those cultures value people and civilization, they will have to adopt policies that do not take the natural working of things as normative.

The picture may prove very different in the advanced economies. With the engine of science, high technology, and global competition, the market economy will so greatly enrich a portion of the population that their wealth may provide demand for services from the others. Riches will go to leading-edge entrepreneurs, a certain fraction of the population that is employed in operating existing or creating new technology, people who provide something marketable that mass markets can disseminate to tens of millions or even billions of others, and investors who own part of the productive mechanism and derive dividends or interest from it. If there are enough of these, they may well provide demand for a multitude of subsidiary services to be performed by others (subject, however, to the fact that most of those services will be more and more available through means other than mass human effort). In the Introduction, I used the example of a town in 1849 California, where everybody didn't need to derive wealth from the gold mines; it was enough that some people did; those provided a sufficient base for an influx of merchants, saloon-keepers, doctors, and the like. The same "spreading" mechanism can apply in an economy where there is a high-tech core producing a major flow of income. (The name "trickle down" hardly seems to describe it in a normal setting where everybody with energy can do well. It will apply more appropriately where a highly polarized system makes a large number of people contingent, marginalized into taking what will in effect be only the scraps of a magnificently productive mechanism.)

We may not welcome some of the forms this spread-out may take. I saw reference the other day to the possibility that domestic servants may again come into demand, just as they used to be. And I recall that in the main hallway of the historic old Hotel Colorado in Glenwood Springs, Colorado, there is a picture of the gangster Al Capone, with a caption under the photo that reads: "Legend holds that during prohibition, a Hotel Colorado bellman delivered a case of gin to Capone at his request. In a gesture of appreciation, Capone tipped the bellman enough to put him through college at the University of Denver." Is that the type of thing we want people dependent on for their income?

The wages for the millions who will provide ancillary services will be pressed down, to be sure, by the limitations of demand, the introduction of non-labor-intensive ways of providing them, and the enormous supply of people anxious to offer them. In theory, those wages could fall to the subsistence level, but in fact they won't unless the cultural factors that have repealed Malthus's dire predictions (about the expansion of population always pressing on subsistence) are also repealed, such as by mass immigration. In fact, the "rising tide" of potential well-being caused by science and technology may even lift everybody to a level that in absolute terms is higher than the present one. But the wages will be very low relative to the riches of the groups of people who are able effectually to plug into the productive mechanism. Although, as I have said in various connections about the trends we are discussing in this book, we are still just in the incipient stages and the process has much, much farther to go, this polarization of income and of wealth is precisely what we have been seeing -- and is what the free-market economists quoted above agree is occurring.

Well, then, if this is what may happen, what is the point of this book? Isn't inequality -- even some considerable inequality -- simply an indication of the normal operation of a free society based on the market economy? Won't the unequal distribution be a product of free contract, so that people will receive neither more nor less than what freely-arrived-at contracts will lead them to receive? And don't inequalities of income and of wealth simply demonstrate the salutary fact that there is no "command economy" dictating some other distribution?

A consideration of these things is precisely why we must devote detailed attention in coming chapters to issues that many readers will have thought "are too academic for me." The really interesting and important part of our discussion is yet to come. Far from "academic and theoretical," such questions go to the heart of how we are to live and to organize society. The review we have made of the science and technology is just "the sizzle that comes with the steak." The real meat lies in the steak itself, which in this case is the type of free society we fashion from the new developments.

If the supporters of a free society extrapolate their market ideology (as so many of my friends are wont to do) to provide a normative rationale for the developing polarization, they will be holding to the outer shell of their (and my) philosophy without remaining true to its substance. Classical liberalism has seen the market economy not just as an essential alternative to a command economy, but as a way to realize the benefits of the vital energies of millions of people pursuing their own ends. The theory of the "invisible hand" postulated that "natural processes will indeed work to the general benefit." The aspiration has been a vast middle class, with the entire population producing and benefiting. Classical liberalism, in its love of liberty, has embraced many of the values of aristocracy in the best sense, since it isn't slobs who are best fitted to be free men; but classical liberals have believed in an aristocracy of merit, not culturally (or technologically) hardened aristocracy. They saw the Old Regime of medievalist Europe as antithetical to their "republican" aspirations, not as an expression of them.

This means that we have our work cut out for us. The issues won't be nearly as "easy" as they would be if mass unemployment were the sole form the incoming worker-displacement can take. We will also need to grapple, in the alternative, with something somewhat less extreme: sharp polarization. This means we will be required to look into all the conceptual nooks and crannies of the philosophy of a free society to see what is truly sound and what, given the onrushing circumstances, will not be. Most especially in the context of polarization rather than permanent displacement, we will have to examine fresh the fundamental conceptual basis for earnings and for property, revisiting John Locke to raise again the questions of legitimacy and entitlement. The Lockean concept has been that "somebody mixes his labor with something and thereby becomes the owner of it," creating property; and that all earnings and wealth are then derived from freely-contracted-for-transactions dealing with that property or the property each person has in his own services. The classical liberal economist Frederic Bastiat centered his excellent little book The Law on the premise that any deviation from this property-and-contract nexus would be theft. This has provided a compelling rationale against socialist attacks on the market. The question will be to what extent it continues to do so under conditions that defeat much of what classical liberalism has long sought.

ENDNOTES