If we ignore the hallucinatory “lack of confidence” theories of mass unemployment – too many new government regulations, excessive corporate taxation, too many illegal aliens, and so on – there are two major categories of theories left.

The Keynesian demand-side theory simply points out that when people have less disposable income, they buy less, so fewer workers are needed to produce the smaller quantity of goods and services that are demanded. The government must therefore step in as the big spender of last resort to get the economy moving again. Paul Krugman and his “little models” of economic activity can explain why such policies will sometimes have the desired effect. However, that insight can’t convince us that any plausible Keynesian push in the right direction will bring the existing system to “full employment” given the current state of automation, globalization, and resource constraints. Krugman, in admitting that the Great Depression was ended by the Second World War and not the New Deal, nevertheless sees that fact as a confirmation of Keynesian theory, minimizing the obvious massive changes in the relationship between the economy and the wartime government.

The Reagan-era supply-side theory that corporations will invest more when they’re allowed to keep a bigger share of the national income has been rendered obsolete by the facts. Many corporations are making large profits and simply banking the money, seeing no reason to expand operations. One might reasonably suspect that this is because executives know better than to invest in meeting demand that doesn’t exist, but the supply-side theorists have moved on. Their current “structural” theories assert that our current high unemployment is caused by a necessary adjustment of the American workforce away from the skills and habits required by the old industrial economy to those demanded by the economy of the future. The adjustment may be slow and difficult, but will lead to solid and lasting prosperity if allowed to run its course. Unless the infallible free market decides instead that it should lead to Marxian mass impoverishment.

Rather than considering the crude Calvin Coolidge form of the structural unemployment theory, we can venture out to the cutting edge of the Next Economy with the aid of Thomas Friedman’s NYT piece from July 12. Here’s what’s happening in the job market:

“[W]hat is most striking when you talk to employers today is how many of them have used the pressure of the recession to become even more productive by deploying more automation technologies, software, outsourcing, robotics — anything they can use to make better products with reduced head count and health care and pension liabilities. That is not going to change.”

And:

“Whatever you may be thinking when you apply for a job today, you can be sure the employer is asking this: Can this person add value every hour, every day — more than a worker in India, a robot or a computer? Can he or she help my company adapt by not only doing the job today but also reinventing the job for tomorrow? And can he or she adapt with all the change, so my company can adapt and export more into the fastest-growing global markets? In today’s hyperconnected world, more and more companies cannot and will not hire people who don’t fulfill those criteria.”

Friedman, being Friedman, spins this as an opportunity for us all to prepare ourselves for the inevitable Brave New World in which we will all be entrepreneurs, perpetually relaunching ourselves as start-ups. He quotes, approvingly, the wisdom of a Web entrepreneur who has co-written a book about working in Friedman’s future: “[F]ind a way to add value in a way no one else can. For entrepreneurs it’s differentiate or die — that now goes for all of us.”

Personally, I believe in the ugly naked core of Friedman’s theory of structural unemployment. Americans are unemployed because globalized businesses have found ways to make more profits without hiring American workers. But it seems completely insane to me to imagine an entire society of hundreds of millions of people eagerly pursuing success with a “differentiate or die” mentality. Either Friedman has never really thought this through, or he lives in a world populated by an entrepreneurial elite that sees the bulk of humanity only dimly, as an undifferentiated resource to be used when needed and ignored otherwise.

What we’re seeing in post-industrial America is a social paradigm that is being pushed to its breaking point. If the American economy can only “advance” by leaving most Americans behind, some kind of radical change is inevitable.

[Cross posted from the Dead Planet Network.]

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