Pollyanna analysts

By Gerard Jackson
web posted September 20, 1999

Against signs of tightening labour markets some 'analysts' have adopted the Pollyanna approach to economics, arguing that greater competition and improving technology will fuel productivity growth which will in turn keep profits healthy and underwrite real pay rises. I have to admit to envying anyone who can get well-paid for echoing this nonsense. In a genuinely progressive economy, one in which per capita investment was rising, tight labour markets would be the norm, even as general prices fell. That this fact has virtually dropped out of all media economic commentary only demonstrates how badly newspapers tend to serve their business customers, not that a lot of economists are any better.

Dropping the Disneyland approach to economics in favour of some real economic theory reveals another story. As a progressive economy increases per capita investment, i.e., provides labour with more and better tools to work with, it adds more and more complex stages of production to its capital structure. The structure now becomes longer and more specialised, which then raises the value of labour's marginal product. Obviously, this has the effect of raising the demand for labour. A not so obvious effect is that labour shortages emerge as firms find difficulty in getting sufficient labour to man their plants. The reason is that labour and capital are complementary, i.e. capital needs to be manned. It is only the immediate and short-term effects of labour-economising machinery that conveys the impression that capital is a substitute for labour.

As the demand for labour rises followed by rising real wages, consumer prices tend to fall, paradoxical as this would appear to most of today's economic commentators. The reason should be self-evident. Prices are falling because productivity is rising due to increased investment — the same investment that is raising wages. (I've assumed that increased productivity has not been offset by a rising money supply.) The result will be that low-paying, low status jobs will tend to remain vacant. This is not an airy-fairy Austrian view of labour markets. Something very similar to this happened to Germany in the late fifties and sixties. The country accumulated capital so quickly that it ran into labour shortages, forcing it to import labour (guest workers). A far cry from the dismal economic circumstances of the twenties and thirties.

A short distance away Keynesian Britain also suffered severe labour shortages during the fifties, forcing it to import labour to man its hospitals, public transport systems, etc. But German productivity led Britain and living standards rose faster, while the latter also suffered balance-of-payments crises, external deficits, creeping inflation and rising interest rates which created what became the "stop-go" cycle. And here is the clue. Britain's labour shortages were artificial, generated by inflationary policies that resulted in Britain being labelled the "Sick Man" of Europe.

So when tight labour markets emerge the question of whether they are inflationary or not should never be asked. What we need to know is whether they are caused by the happy circumstance of rapid per capita investment or by the dangerous policy of rapid monetary expansion.

Pollyanna economics doesn't even know that this question exists. That is why it is forever asking a meaningless economic question that only serves to fuel its baseless optimism. We have just seen that rising productivity can only come from increasing investment — and investment always embodies technology. So it is absurd to talk of technology generating profits and driving productivity unless it becomes part of the material means of production.

Once again: Is genuine investment generating America's tight labour markets or the Fed's loose monetary policies?

Gerard Jackson is editor in chief of the peerless New Australian.




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