Labour’s Marxian Solution to the Current Crisis
Karl Marx identified the basic cause of repeated
economic crises affecting capitalist societies as “underconsumption” –
consumers purchase less than needed to buy up the supply of goods in the
economy, which leads to reduced production, unemployment and financial problems.
He argued that it is the inevitable result of capitalists’ exploitation
of workers, who are paid less than is owed to them.
He foresaw an end to these crises coming when workers rise up, throw off
their shackles and take over capital and the income it produces.
Marx’s influence has been strong because it
justifies the raising of wages with government help, which is welcomed by
workers and politicians competing for their votes. For union leaders the higher wages are a return to their
political lobbying efforts. In the
past, even employers welcomed the raising of wages during recessions, partly
because they believed Marx’s analysis that it would restore prosperity and
partly because it would prevent communist revolutions.
During the Great Depression of the 1930s
Presidents Herbert Hoover and Franklin Roosevelt enacted policies to eliminate
underconsumption. Richard Vedder
and Lowell Gallaway in their book Out of Work (The Independent Institute,
1993) document how the legendary industrial leaders of the age in the United
States like Pierre Dupont, Henry Ford and Andrew Mellon had lobbied Hoover to
adopt a policy of “jaw-boning” employers into paying higher wages.
Here is the rationale for this policy given by Henry Ford:
“Nearly everything in this country is too high
priced. The only thing that should
be high priced in this country is the man that works. Wages must not come down, they must not even stay at their
present level; they must go up.”
Don Lescohier, a prominent historian of American
“In 1930-31 [wage cuts] were opposed both by
the government and by leading employers, in the hope that the maintenance of
wage-earners’ income would furnish a market for products and help business
recovery.” (quotedMarx , Unions and Current Crisis
in Vedder and Gallaway)
Roosevelt’s policies aggravated the situation
by the use of indirect increases in wages - strengthening unions, the creation
of social benefits financed through payroll taxes on employers and the payment
of above-market rates to workers on the public infrastructure projects.
How great was the damage done by these higher
wages created by government policies? Vedder
and Gallaway estimated Hoover’s Roosevelt’s raised the unemployment rate
from 6.7 percent to 17.2 percent.
is important to remember this history because powerful unions in Canada
recommend wage increases to solve the economic crisis of 2008, using the same
rationale provided by Marx. On
October 6, 2008, Ken Georgetti, the President of the Canadian Labour
Congress issued a statement on the economic crisis, which said:
“Unemployment will soar if governments, at the national and
international level, do not take real measures to fix the real problem of
stagnant wages…” (http://canadianlabour.ca/working-families-demand-a-fundamental-change).
There is little doubt that fixing
stagnant wages means raising them. Jim
Sinclair, the President of the BC Federation of Labour in a CBC radio
interview on November 24, 2008 expressed this view more explicitly when he
said that higher wages are needed so that workers can spend more money and
pull the economy out of recession.
As reported by Dave Hall (Financial
Post, 8.11.08, p. FP3), Jim Stanford, the chief economist of the Canadian
Auto Workers at a meeting in Windsor, Ontario declared that “If CAW workers
agreed to wage concessions…you would have taken millions of dollars out of
the economy and sales would still not increase.”
The raising of wages as a solution to
the current crisis is also suggested by US President-elect Barack Obama. He promised to strengthen union power, which would be used to
obtain higher wages. He also
promised new social programs that would be financed by payroll taxes and thus
raise the cost of labour.
Why did government induced wage
increases raise unemployment during the 1930s and would deepen the current
crisis? Simple economic reasoning
provides the answer. Employers
hire additional workers only if their contribution to the value of the output
of firms (marginal productivity) is greater than the cost of the workers
(marginal cost), as measured by wages, fringe benefits and payroll taxes.
If the marginal productivity of workers is less than their marginal
cost, they are laid off and unemployment increases.
During cyclical economic downturns the
marginal productivity of workers falls because firms sell less and lower
product prices reduce the value of the firms’ output.
If under these conditions wages are maintained or raised, unemployment
increases and the recession deepens. Importantly,
if wages were lowered to equal workers’ productivity, unemployment would not
But how would economic prosperity
return? Low returns to investment
and reluctance of consumers to borrow cause demand for credit to fall and
results in lower interest rates, which in turn induces increased borrowing and
spending by investors and consumers. One
reason why recovery based on this process failed to materialize during the
1930s was the failure of the Federal Reserve to maintain the supply of money
and to allow interest rates to fall, according to the findings of Milton
Friedman and Anna Schwartz in their famous book A Monetary History of the
United States,. The current
policies of the major central banks of the world acting on this historic
experience are doing their best to prevent a repitition of these damaging
Unfortunately, the challenges of the
central banks are aggravated by the fact that for a variety of reaons, wages
have not been falling to match decreased labour productivity. Therefore, unemployment has been rising and demand by
consumers has been falling correspondingly, which in turn lowers labour
productivity and investment further, in the classical vicious cycle that
scares the public and leads many to be very pessimistic about the future.
History shows that such pessimism in
misplaced. Economies always
recover, helped by fiscal stimulus but mainly because lower interest rates
eventually lead to more private consumption and investment.
However, the speed of recovery is
reduced if Marx’s ideas are victorious and lead to government policies that
prevent wages from falling or increase them.
For this reason, policy makers should ignore the demands for higher
wages by unions and for policies that lead to indirect increases in the cost
of labour. They should also avoid
bail-outs of industries in distress because it lowers workers’ incentives to
work for lower wages.
Professor of Economics (Emeritus),
Simon Fraser University
Senior Fellow, The Fraser Institute