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Sunday, September 6, 2015

The Bullet in the Head

skull with gunshoot hole

A philosopher is a friend (or lover) of the Truth. One might think that this would be a curious distinction to claim as are we not all friends (or lovers) of the Truth and, hence, every man and every woman a philosopher?

One would be wrong. For most of usThe author here deploys the annoying rethorical trope of referring by the pronouns of the first-person plural to a group he obviously does not consider himself a member of. Even the second-person plural would be inaccurate for the author trusts that many of his readers are not in that group and even dares hope that some readers who are will, by dint of his words, become alienated from it. Only the third-person plural would be accurate. But that would lend the words a tone of accusation, rather than the one of humility he strives for. And even the President frequently deploys this trope, so it cannot be wrong. have barely a nodding acquaintance with the Truth. Whenever Truth disagrees with any widely held and cherished falsehood, we readily disavow even our acquaintance with her. And whenever Truth conflicts with any delusions comforting to our self-esteem, we denounce her with red-faced fury. For the pleasures of social acceptance and self-esteem are, to most, vastly greater than the enjoyment of Truth’s friendship.

In modern times, there is perhaps no more striking illustration of this fact than that furnished by the issue of involuntary unemployment. Persons are involuntarily unemployed if there exists a wage for which they would be willing to work and at which their services could be profitably employed, but yet finds themselves unable to find any work. In so far as substantial involuntary unemployment exists—and the evidence strongly suggests that at least sometimes it does—it is a great economic waste and, even beyond that, an enormous social ill.

The elementary truth, acknowledged by any neophyte of economics and even the most left-leaning competent economists (at least in private and amongst themselves), is that the proximate cause of involuntary unemployment has to be that for groups experiencing this misfortune the prevailing wages must be too high.At this point, a reader might object that cutting wages in times of mass unemployment would be disastrous as it would further decrease the population’s purchasing power and aggravate unemployment in a deflationary spiral. Maybe so. But in the above discussion, prices are understood to be real (that is, their ratio to the prices of other goods and services). Real wages can readily be cut while keeping nominal wages constant by the simple expedient of allowing the nominal prices for all other goods and services to rise.This implies that if one group—let’s say, inner-city youth—experiences high involuntary unemployment while another—let’s say, bankers—does not, then to eliminate that unemployment the relative wages of the first group have to fall compared to those of the second group. That is so, because in the real economic sense bankers would be underpaid compared to inner-city youth. If you reject the very notion that this could be so, because you find it so offensive, you are no philosopher. Hence real wage reductions for involuntarily unemployed groups are compatible with any desired monetary regime—inflation, deflation, or price stability.

This conclusion is not the product of some obscure theory or dubious assumptions. It follows immediately from the most basic, uncontroversial understanding of economics. To any student of economics it is as obvious an answer as, to any student of anatomy, is the answer to the question of Why is this man dead? Probably the bullet in the head.

That wages are too high is not the end of the inquiry. The obvious followup question is how, in a market where prices freely adjust, the prevailing wage could be too high. The answer to the followup is sometimes easy—minimum wage laws—and sometimes far less so. Similarly, our anatomy student might next ask how, given that observationally people seem to take great care not to place bullets into their own or others’ heads, this bullet did end up in that head.

But the conclusion that wages are to high is the necessary beginning of the inquiry. Failure to acknowledge it is as delinquent as would be a pathologist’s autopsy report of a gun-shot victim which failed to mention the gun-shot wound.

The problem of unemployment and efforts to alleviate it have, over the past century or two, been the subject of an enormous amount of public attention. All politicians speak of it and—in periods of high unemployment—at great frequency. Political programs focus on it. Countless commissions, blue-ribbon and otherwise, have studied it and issued reports. Endless laws have been proposed and promulgated against it.

Yet, how many of them even mention or acknowledge the very beginning of the inquiry—that prevailing wages must be too high? Hardly any. Almost all of these efforts are as negligent as that hypothetical autopsy.

No, most of us are definitely not philosophers.

Update September 10, 2015: Another post attempts to clarify confusion concerning the term involuntary unemployment.