New Economy Journal

On Unemployment

Volume 2, Issue 5

October 20, 2020

By - Gavin Tang

Piece length: 3,172 words

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Many people think of unemployment pretty much as mainstream economists and the government would have us think about it – that it is a statistical number of people looking for work according to a rather arbitrary definition set by the government. It is much more than that. The reluctance to delve deeper into this phenomenon is in part because the causes of unemployment stem from capitalist practices which are too confronting for the wealthy elites to examine. To deal with the cause of unemployment is to reckon with the most entrenched dogma in capitalism, which is the right of the wealthy to use money to make more money without working.

People usually think of trying to solve unemployment in terms of ‘creating jobs’. Allow me to give an example of a ‘job creating’ venture that appears to, but does not, address the issue of unemployment.

Imagine you are in a town where there is an issue of youth unemployment. You might try to set up a cafe to train young people to be waiters and baristas etcetera. You give some people work and employment and it seems that jobs have been created. In the whole of society however, no such job creation has taken place. Why? Let’s look at the people who come into the café to buy food and coffee. If the café did not exist, they would have taken their money elsewhere to buy a similar product; or they may simply have saved it to put towards the purchase of some other good or service, such as a piece of furniture or a haircut, and so on. In spending money in the cafe, and not spending their money elsewhere, their overall contribution to the economy remains static. This shortfall in demand in the rest of the economy contributes to unemployment in the rest of the economy. This undoes the employment generated in the cafe you just set up. One could say that the area of unemployment has been ‘translocated’ elsewhere in the economy. Because this translocation of unemployment is dispersed throughout the general economy, it is hard to see a cause-and-effect – but it is certainly there if one looks closely enough. What is true of this example is true also of Centrelink’s ‘Newstart’ program and similar programs that try to create employment. (The current Coalition government got voted in on a mandate of ‘job creation’. As I will show, the structure of Capitalism is such that governments have very little leeway on this issue.) The gist of this is that unemployment cannot be addressed by creating or finding a supply of jobs; unemployment can only be addressed by looking at the demand for goods and services. As many people who have had failed businesses know, it is of no use to try to create a supply of goods and services (and jobs) if the demand is not there. In this article, I will identify the causes of this lack of demand. And no, simply demanding that the government spend more money through deficit spending is not an acceptable fix.

Why every person who has to work for a living – even those with well paid jobs – suffers from the effects of unemployment.

Let’s just cut out the rather arbitrary definition of unemployment that governments use to delineate those who are eligible for the dole and those who are not. Everyone who has to work for a living suffers from the existence of unemployment in our society. Unions know this very well --when unemployment is high, their ability to bargain for things like higher wages is undermined. Every wage earner, whether collectively through union wage bargaining or through individual negotiations with their employer, knows that they can’t ask for a wage as much as they would like on account of the number of job-seeking people with the sameskillset.. Anyone who is self-employed or runs a business knows they can’t charge as much for their goods and services as they would like if there is not sufficient demand. In short, everyone who has to work for a living has to curtail their wage demand or business income in order to not become one of the army of those considered ‘officially’ unemployed.

In short, people are not so much suffering from under-employment as they are from under-remuneration. There is never a shortage of work that needs doing, including the care of the very young, the sick and the elderly – so the idea of ‘not enough jobs’ is rather absurd. The question is whether these potential jobs would pay enough to live on.

A very simple explanation for the cause of unemployment

With unemployment, we have a situation in which on the one hand there is a real need for goods and services which are not being met; on the other, there is an army of people who could be employed in the production of those goods and services but are instead sitting idly at home (or waiting in a Centrelink queue). This contradiction defies logic . The problem facing the unemployed is not that there is not enough real need for the goods and services they could provide; the problem is that there is not enough monetary demand. Society as a whole is not generating enough monetary demand for goods and services to get the unemployed into employment.

The answer is not that there is not enough money. If we doubled the amount of money in the economy so that everyone has twice as much credit (and debts) than they currently have, then prices would double and the unemployment problem would remain. The answer lies in the circulation, or lack of circulation, of money in the real economy in which goods and services are traded; and in the haemorrhage of money into what I call the ‘investment economy’. How does this haemorrhage take place?

Consider your average wage-earner or self-employed person. When she pays rent of say $400 per week, that is $400 that she is not spending on the purchase of goods and services. This $400 could have paid for say two days employment for a waiter or care-worker. In turn, this hypothetical waiter or care-worker does not have $400 to spend on goods and services; and so there is a knock on effect --a large number of people suffer from under-employment due to one person’s rent payment. There is a mitigating factor to this process and it is that if the landlord who receives the $400 per week rent spends all that rental income on goods and services, then this rent payment is not causing any shortfall in the monetary demand for goods and services. The landlord is recycling the rent money into an immediate demand for goods and services. (Incidentally, the government does this with tax revenue, so taxes are never a source of unemployment.) However, imagine that the landlord is a person so rich that they can live on just say 10% of his rental income; of that $400 a week rent that they receive, they are not spending $360 of it – and that creates the unemployment problem just described.

Now consider where that $360 might be going. Quite likely our rich landlord will be ploughing it into yet another mortgage on an ‘investment’ property. In doing so, he will be raising the price of land, and also raising the rental rates in society, and the size of mortgages that people have to take out to buy property. All of this will contribute towards a future in which a yet bigger proportion of people’s income is not being spent on goods, making unemployment a yet more intractable problem.

As an ‘investor’ becomes wealthier and wealthier, so will he spend a lesser and lesser percentage of his income on goods and services so that the ridiculously wealthy people in our society might spend less than 5% of their income on goods and services. The other 95% of their large income becomes a corresponding lack of demand for goods and services and therefore a huge source of unemployment. I will show later that no ‘investment’ (in a capitalist sense) actually contributes towards the production of goods and services, i.e. no investor is actually providing any real service to society for which they can claim their investment income is their reward.

A quick refutation of some of the regularly touted scapegoats of unemployment is in order. Migrants are often said to take away jobs from the existing residents of a country.. Consider someone who migrates to Australiaand takes up a job as a nurse, carpenter or cleaner. He appears to have taken a job that could have been given to a local. He earns some money with his job. He can’t eat the money so he proceeds to buy goods and services with his income. This spending on his part is creating as much work as he appears to have taken up with his job. This is true for an individual and for immigrants as a whole. This castigation of immigrants is illogical and unsupported by evidence.

Occasionally people argue that technology takes away jobs. So if a company streamlines its production with computerisation or some other technology, some workers are left redundant. However the cost savings are in part passed on to the buyers and consumers and they will then create demand (and jobs) elsewhere. Employment is translocated elsewhere. In part too, some of the savings goes to make for a higher remuneration of workers and owners of the company. If they spend that all extra income on goods and services, they too will be creating demand and jobs elsewhere.

Using the same line of reasoning, one can show why we do not need environmentally destructive projects like the Adani coal mine to ‘create jobs’. We do not need to force feed the economy in order to keep people employed.

Unearned income

Unearned income may be defined simply as income derived without contributing (labour) towards the production of goods and services – the very goods and services which the unearned income can make a claim on. The above example of rental income was used because it is the one most people can relate to. In fact there are three primary sources of unearned income.

A point of clarification may be in order. When a person rents out, say, a house, there are two components to the rent – one is the rent of the land; the other is the upkeep and/or replacement of the house at a future date. The latter is a perfectly justified form of income, not unlike a rental company that rents out machinery that it owns. Land on the other hand is not man-made, is not consumed, needs to be accessible to everyone, and should never have been taken out of communal ownership.

Consider the share ownership of a company, which is to say all the companies on the stock market and a number of unlisted ones. A person buys a number of shares, takes no risk other than the possibility of a dip in the share price, and then takes a cut of the company’s profit in the form of a share dividend – without contributing anything towards the production of goods and services. Every dollar paid out to the share owners as profit is a dollar not paid to the workers who created the goods and services produced by the company. In short the workers do not have as much income to spend on goods and services as they would if profits were not diverted to shareholders. (Think about it: the shareholders are the real cost of production, not – as Capitalism asserts – the wage-earners.) Yet again, if the shareholders did spend their share dividend income on the purchase of goods and services, they would not be contributing to unemployment – but wealthy share owners do not spend more than a fraction of their income in such a manner. Typically they buy more shares with their income, sending up the prices of shares, which increases the pressure on its workers to deliver more profit, and so on. (A share worth say $5.00 delivering a 5% return has to generate twice as much profit if its price rises to $10.00, and shareholders are trying to maintain a 5% return). The pressure on corporations to deliver ever increasing levels of profit creates many more problems than unemployment – such as the corruption of the legislatures – but it is best not to stray from the unemployment topic for now.

I have shown that land rental income and the share dividend are two forms of unearned income. The third form of unearned income is interest on loans. It is the ownership of a bank licence that generates this ‘right’ to make loans and therefore a ‘right’ to interest payments as income.

The naïve perception of banking runs something like this: people have money that they are not using. They place it in a bank as a deposit which in effect is a loan to the bank. The banks aggregate these loans/deposits and then re-loans the same money to others who want to access it as a loan. Through the interaction of the supply of money by lenders and demand by borrowers, the level of interest rates arises. This picture is how the banking system would like people to imagine what happens in banking – but it bears little relation to reality. One can verify it very quickly by observing that depositors (lenders to the bank) can access their money as easily as borrowers. The same money should not be equally accessible by depositors and borrowers if banks were actually loaning out depositors’ money. What actually happens is that banks just create new money in their ledgers (computer ledgers that is) and this ledger money is every bit as real as paper money as they are convertible one to another. This process of creating new money out of nothing is called credit creation. It gives the banks two immense sources of power. The first power is easily identified – it is the enormous amount of interest they generate from their loans. The second, which too often escapes scrutiny  by critics of the capitalist banking system, is the ability of banks to dictate the terms and conditions of their loans. As I will show later, this second power allows for the existence of the share owned corporations as well as the practice of private ownership of land.

Someone discovering this fact for the first time should be (rightfully) livid at this absurd situation. Private banks create around 95% or more of the total money supply in most developed countries. The highest is in the U.K., where it reaches 97%. Consider the situation in which you borrow a huge amount for a home loan and then pay back twice what you have borrowed (on account of interest payments) before taking title to the property – the bank has just made the equivalent of the original value of the property by doing absolutely nothing apart from a bit of paperwork. The sweat and the stress of losing your house, the countless hours of overtime and the hours not spent with the children, the loss of time with your friends and your community, and so on – all this stems from the fact that the banks have a licence to issue new money with every loan and that they charge a dubious thing call ‘market interest rates’ on the provision of finance.

Henry Ford is reputed to have said "It is perhaps well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." Implicit in this quote is the idea that people would instigate a political revolt demanding the closure of private banks (and the creation of a public bank). I would go further and say that if people really understood not just how banking works, but how it can work, we could start a bank as a grassroots project - and without government support – that would empower us to make a New Economy a reality.

An important tangential issue: speculation and financial crisis

To recap, there are three primary kinds of assets which provide three sources of unearned income. In table form they are:

Asset Unearned Income
Banking licence (and bonds) Interest on loans
Share owned company Share dividend
Land (and natural resources) Land rental

The above unearned incomes on the right hand side are types of unearned income. To complicate matters a little, there are degrees of unearned incomes. The above incomes are primary unearned incomes. There are secondary and tertiary degrees of unearned incomes as well. The secondary degree involves capital gains in bonds, shares and land. So for instance the increase in land value (capital gains) makes for a secondary degree of unearned income for its owners. A tertiary form of unearned income is derived from options and derivatives on the above assets. The primary unearned income is derived from owning the asset in question; the secondary is derived from buying and selling of the asset; the tertiary is derived from gambling (‘taking a position’) on the price movement of the asset, so that it does not even require buying the asset at all. The secondary and tertiary unearned incomes make for a speculative economy with boom-bust cycles, as people borrow money (which banks create using credit creation) and hope that the secondary and tertiary forms of income are greater than the interest rates on the loan. I will not examine this topic further here except to say that if these assets are not, or could not be, privately owned, there can be no speculation and no financial crisis.

The primary type of unearned income feeds the secondary type. So for instance, land rental is rolled over by landlords into the purchase of more property and this action sends up the price of land. Other people realise that it is in their interest to purchase land as soon as they can manage – and this feeds the process of ever-increasing land prices.

A recap of sorts

I have argued that unemployment stems from the capitalist practice of the private ownership of banks, of the large corporations, and of land (one can also add natural resources to this list). The ownership of these assets leads to unearned income, and the payment of these unearned incomes causes money to be diverted away from the purchase of goods and services. The question then for anyone who seeks to address this socially unjust situation is: ‘How can society claim ownership of these assets without some draconian action which creates a form of communism; which does not impinge on our freedom as economic participants; which does not diminish our incentive to work and produce goods and services; and which at heart is totally satisfying from a moral and ethical point of view?’

Gavin Tang is crowdfunding support to write a book called Money. The link is at https://threefoldeconomy.wixsite.com/aaaa/crowdfund-gavin-to-write-a-book

3 Replies to “On Unemployment”

  1. Thank you for your thoughtful article. I hope that the discussion it stimulates will contribute to your evolving book. Here are my two comments:
    1. The following statement is not generally correct: “If we doubled the amount of money in the economy so that everyone has twice as much credit (and debts) than they currently have, then prices would double and the unemployment problem would remain.” As pointed out by proponents of Modern Monetary Theory (MMT), it’s only true when the economy is operating at full capacity. Right now, most economies around the world are operating far below their respective capacities. Now is the time that a Job Guarantee would be extremely valuable. MMT argues that governments with monetary sovereignty can fund a Job Guarantee be creating money without creating debt or inflation.
    2. I’m not a supporter of capitalism but, in the interest of accuracy, must point out that investment does in general create new jobs. If the “rich landlord” invests in new housing or a new wind farm, jobs are created in construction, sales, etc., and the people who are employed will spend their additional earnings above the dole in creating additional jobs.
    Best wishes, Mark

    1. Hi Mark, thanks for your comments. Here’s my reply to your points.

      1.Okay. This statement is based on the theoretical (but not actually possible) situation in which all credits (including money in wallets) and debts doubled overnight. Then nothing would change in terms of unemployment. If governments injected more money into the economy via deficit spending, this would create jobs and the initial impact on inflation would be minimal for the reason that government or central bank money only makes up for about 4-5% of the total money supply (the rest being created by private banks with their loans). This injection of money into the economy gives some people extra income which will incentivise them to take out a mortgage – unearned income then goes to the bank as interest on the loan. Money gets tied up. Corporations can also make extra profits on account of government spending. This too becomes unearned income for company owners; so the economy is then ‘reset’ back to where it was where money is tied up with the 1% so to speak. In other words the injection of money has only a temporary fix. For a short while, the distribution of money is skewed back towards that sector of the economy which will actually spend it (and thus create employment) but then it gravitates back to purchase of assets. I could write an article on how rent, mortgage repayments, and return on shares creates inflation (as a cost of production); and that these things go up when there is more money in the economy (because the underlying asset increases in price). I don’t have the time to do this so I hope you can see this relationship yourself.

      2.I meant investment in shares, land (as opposed to housing), and bonds. The things you mention (wind farms etc) are goods and services. Land, shares and bonds are not goods and services and their purchase do not create employment. (A note on bonds: they shouldn’t exist because the government should be borrowing interest-free money from the central bank rather than from the money market. Since our money supply is 95-96% created by private banks via credit creation, the money that is used to buy government bonds almost wholly originate as money created by private banks.)

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