Out of Work. Richard K Vedder
and stability of the authors’ daring estimating equation for unemployment as a function of real-wage rates.” Although less than a decade has passed since that was written, we do believe that the experience of the 1990s strengthens the thesis of this book, namely that employers respond to the cost of labor in making their employment decisions, and that governmental policies have often inadvertently raised both these costs and unemployment. So in this new edition we add an afterword (chapter 16) that chronicles the experiences of the 1990s thus far. We find that the adjusted real wage explains unemployment trends in the last decade of the century as well as it did in the first nine.
We have also added a second appendix that deals with some of the issues raised either publicly or privately by colleagues in the economics profession. For researchers wishing to replicate our findings, we include some quarterly data for recent decades. We perform a number of statistical tests to deal with esoteric (to some readers) issues such as Granger causality, model specification, and heteroskedasticity. In doing this, we move somewhat away from the low-tech approach adopted in the first edition in order to increase confidence among professional economists in the power and validity of the basic theoretical framework. At the same time, we confine this material to the appendix so that the interested lay reader need not be burdened by excessive technical analysis. In the first edition, in two places we spoke briefly of geographic variations in unemployment; subsequently, we have done far more extensive work on this topic and present some of our findings here.
A plethora of studies have been produced since the first edition that relate to issues raised in this book. Although some of this research represents worthy scholarship, in our estimation nothing in it fundamentally challenges the approach used here in any convincing fashion, so we refrained from attempting to enumerate or comment comprehensively on the recent literature, although we do mention some of that work in the new material.
We thank the many persons who graciously commented favorably on the first edition and who have used the book in classrooms and elsewhere. We express our gratitude to New York University Press for its support in bringing out this new edition. Our colleagues Chulho Jung and Tony Caporale graciously assisted us on a number of technical and other issues, and their help is appreciated. Again, we wish to thank David Theroux of the Independent Institute for his entrepreneurial initiative and persistence, which led both to the initial publication of this book and to this subsequent revision.
RICHARD K. VEDDER
LOWELL E. GALLAWAY
Preface to the First Edition
Somewhere about one-third of the way through the twentieth century, the world abandoned an approach to business fluctuations and unemployment that had previously governed human behavior. In the world of economic ideas, the halfheartedly-believed theory that excessive wages were the root cause of unemployment was overthrown. The Keynesian Revolution led the economics profession down an unproductive, destructive path for decades. In our judgment, even today the corrosive impact of the intellectual ferment of the 1930s prevents most students of economic ideas from learning some simple but very powerful verities about the way things work. While the world has increasingly appreciated the power of markets in allocating goods and services, it has failed to grasp that the same market forces work equally well in providing jobs for those seeking them.
The Keynesian Revolution’s influence, however, was not simply confined to misguiding a few academics. It provided the intellectual cornerstone for an alteration of the role of the state in modern society. It led to profound public-policy changes. It unleashed a world of unrelenting inflation, continuing budget deficits, and increased governmental intervention in previously private decisions involving resource allocation and income distribution. It inflamed a politics of envy and ultimately slowed the great economic engine that had propelled the American economy to becoming the mightiest in the world.
This book is about these intellectual and policy shifts as they relate to a great concern of citizens of the twentieth century, namely, unemployment. First and foremost, this book is a history of changing unemployment patterns in the United States, written from a labor-market perspective. Second, it is a critique of public-policy developments that have shaped that labor market and impacted on unemployment. It develops the thesis that the state has increased, not decreased, the magnitude of unemployment in this country, that macroeconomic manipulations of a monetary and fiscal nature have ultimately proved unsuccessful, and that the invisible hand of market forces has done a reasonably good job of providing jobs and incomes for Americans.
The research that led to this book began well over a decade ago. We wrote a little unpublished paper suggesting that unemployment variations in the United States could be nicely explained by using a neoclassical model stressing money wages, prices, and productivity. While we were given some early encouragement (most memorably by Martin Bronfenbrenner), the standard academic journals did not seem interested in our simple (too simple, in their opinion) yet powerful exposition of changing unemployment patterns over a large sweep of contemporary history. We presented the paper to various university audiences, at the Duke-North Carolina-NC State Research Triangle Economic History Workshop, Indiana University, the University of Chicago, and the University of Illinois, among others. The research was furthered by stints by both authors on the staff of the Joint Economic Committee of Congress, where, with the support of Bruce Bartlett and the late Charles Bradford (and indirectly Congressman Clarence Brown and Senator Roger Jepsen) we published (in late 1982) a paper on the “Natural Rate of Unemployment” that incorporated our unemployment model.
In 1983, while spending a delightful and highly productive summer in Palo Alto sponsored by the Institute for Humane Studies and funded by the Liberty Fund, we shared our findings with Murray Rothbard, who encouraged us to write a long paper for the inaugural issue of the Review of Austrian Economics (1987). That formed the nucleus of this book. Another paper (which is the basis for chapter 6), given in 1984 to what is now the Cliometrics Society, furthered our enthusiasm for the project; Donald McCloskey, then editing the Journal of Economic History, was particularly enthusiastic and supportive.
We then wrote a preliminary version of this work, but the pressure of other projects together with other difficulties delayed its publication. In the past year, however, we have returned to the project. The wage framework that is the centerpiece of this volume was used in writing a paper on the post-World War II transition to peace, which Murray Rothbard and Walter Block agreed to publish in the Review of Austrian Economics; Robert Higgs of Seattle University liked that paper, spurring us on further. We began in earnest a thorough revision of our earlier effort. David Theroux, president of the Independent Institute, helped enormously by offering to publish the manuscript.
As Roger Garrison of Auburn University pointed out in an extremely detailed and useful review of the manuscript, this book might be perceived as old-fashioned in many ways. Some will certainly say it is not on the cutting edge of modern economic theory: that the basic theory was espoused decades ago by Austrian economists such as Ludwig von Mises and English classical-neoclassical economists such as A. C. Pigou. For every 1990-era reference on efficiency wages, hysteresis, or real business cycles, there are probably two or three references to what most contemporary economists would consider obscure older works by such unknowns (to them) as W. H. Hutt, Benjamin Anderson, Murray Rothbard, Willford King, or Edwin Cannan.
The statistical analysis primarily uses ordinary least squares regression techniques, which modern econometricians regard as hopelessly primitive. There is no computable general equilibrium (CGE) model here, nor will one find Kalman filters or other such econometric nuances. Yet for other readers, including noneconomists and Austrian economists, there is probably a bit too much empirical emphasis and statistical testing. This is a distinctly low-tech manuscript that may well be scorned both by the devotees of high-tech empiricism, and by the philosophes and praxeologists who prefer a no-tech methodology. Yet we use the approach because it powerfully explains the way the world works in twentieth-century America and is relatively simple to understand, a quality that a majority of economists view with disdain but most Americans still applaud. Further, we feel that, properly interpreted, the arguments presented here are distinctly mainstream in nature and, in fact, represent a pushing back of the frontiers