Class Conflict and the "Natural Rate of Unemployment"

Challenge, Nov, 1999 by Robert Pollin

Thus, even if by partial inadvertence, and in any case almost completely camouflaged amid a mass of econometric detail, Gordon's conclusion returns the discussion of unemployment to the analysis of class conflict and the distribution of income and power. Class conflict, in other words, is the specter haunting the analysis of the natural rate and NAIRU: This is the consistent message stretching from Milton Friedman in the 1960s to Robert Gordon in the 1990s.

Marx, Kalecki, and the "Reserve Army of Unemployed"

Stated in this way, the "natural rate" idea does, ironically, bear a close family resemblance to the ideas of two of the greatest economic thinkers of the left, Karl Marx and Michal Kalecki, on a parallel concept--the so-called Reserve Army of Unemployed.

In his justly famous chapter 25 of volume I of Capital (1967), "The General Law of Capitalist Accumulation," Marx makes clear his view that unemployment is functional to capitalism. That is, when a capitalist economy is growing rapidly enough that the reserve army of unemployed is depleted, then workers will utilize their increased bargaining power to raise wages and shift the distribution of income in their favor. Profits are correspondingly squeezed. As a result, capitalists' animal spirits are dampened and they reduce investment spending. This then leads to a decline in job creation, higher unemployment, and a replenishment of the reserve army. In other words, the reserve army of unemployed is the instrument that capitalists use to prevent significant wage increases and thereby maintain profitability.

Kalecki makes parallel, though distinct, arguments in his also justly famous essay, "The Political Aspects of Full Employment" (1971). Kalecki is writing in 1943, immediately after the depression had ended and the Keynesian revolution--to which Kalecki himself was a major contributor--was gathering steam. Combining his understanding of Marx with his perspective on the Keynesian revolution, Kalecki advanced three important points:

1. We now have sufficient understanding of the economics of aggregate demand so that we can devise workable policies to sustain a capitalist economy at full employment.

2. Contrary to Marx, full employment can be beneficial to the level of profits if not the rate of profit, because the economy will be operating at its highest possible rate of capacity utilization. Capitalists may well get a smaller share of the pie at full employment, but will nevertheless benefit from the full-employment economy because the size of the pie is growing far more rapidly than would be possible with significant positive rates of unemployment.

3. Even though capitalists can benefit from full employment, they still won't support it because full employment will threaten their control over the workplace, the pace and direction of economic activity, and even political institutions.

Compared to Marx, Kalecki thus focuses more on the broader social and political problems capitalists face because of full employment than on prospects for a full-employment profit squeeze. From this perspective, Kalecki then also reasoned that full employment was sustainable under capitalism if these challenges to capitalists' social and political hegemony could be contained. This is why he held that fascist social and political institutions could well provide one "solution" to capitalism's unemployment problem: Workers would have jobs, but they would never be permitted to exercise the political and economic power that would otherwise accrue to them in a democratic full-employment economy.