Our authors’ principal, and admittedly heterodox theses are only two in number, the second thesis being a corollary of the first:
Their first thesis is a matter of theoretical economics. Unemployment is related directly to real-wage rates (adjusted over time for the “quality” and productivity of the labor involved). The British neoclassical economist Edwin Cannan put the point in one sentence in mid-Depression 1932: “General unemployment appears when asking too much is a general phenomenon.”1
Vedder and Gallaway’s second thesis is a matter of American economic history. They apply their first thesis to the American record in the twentieth century, claiming that the average or “natural” rate of unemployment2 in the United States has in the last generation been rising, by reason of such governmental policies as minimum wages, social security, unemployment relief, affirmative action, and the encouragement of trade-union collective bargaining.
As recently as the first third of the present century, the first of the Vedder-Gallaway theses would not have deserved the title of “thesis.” Rather, it was regarded by orthodox economists as a truism, too obvious to warrant either quantitative or historical investigation. Mere restatement sufficed, despite a significant volume of dissent from liberals, socialists, and under-consumptionists led by the economist John A. Hobson, the industrialist Henry Ford, and (as Vedder and Gallaway delight in reminding us) the public figure and eventual President Herbert Hoover.3
Now, of course, the shoe is on the other foot, and the Vedder-Gallaway sort of investigation remains under a cloud. It is no longer the truism it once was; instead, it has come to be regarded as something of a heresy. J. B. Say’s complacent “economic law” about “aggregate supply being, or creating, its own demand” is largely replaced by “Keynes’s Law”4 about “aggregate demand creating its own supply” in the presence of significant unemployment. If aggregate demand is all that matters (in the presence of significant unemployment), concern with wages as costs of production and resistance to upward pressure on either money or real wages are wrong a priori.
Out of Work comprises fifteen chapters. The first three chapters, with the assistance of a technical appendix that contains a formal model of a macroeconomy, derive, compare, and examine direct econometric relations between measured unemployment rates (dependent variables) and real-wage levels adjusted for productivity changes and sometimes lagged over time (independent variables). For the quantitative economist as for the statistician, these constitute the case for the Vedder-Gallaway thesis. The last three chapters are the moral of the tale, which is that public policy has been systematically wrong-headed since approximately 1930, and that the role of market forces in labor relations should be restored to approximately its pre-1930 importance. The intervening nine chapters deal in chronological order with particular periods and incidents in twentieth-century American economic history, from the so-called “Golden Age” of the century’s first generation (1900-30) through the so-called “Reagan Revolution” of the 1980s to the present. To the noneconomist, especially if brought up in the liberal or Keynesian environment of 1930–70, these are at once the most intelligible and the most challenging portions of the book as a whole.
Collectively, the contents of this book seem bound to inspire for many, if not most, readers a combination of surprises and questions. In my own case, for instance, my curiosity was continually piqued by such issues as:
• The underlying rationale for the change in adjusted real wage rates that drive the Vedder and Gallaway analysis.
• The role of public fiscal policies, public monetary policies, and public international-economic policies (not aimed primarily at labor-market developments) in influencing the behavior of the Vedder-Gallaway model.
• The importance of the embryonic or aborted “planned economy” of World War I as perhaps a dress rehearsal for the New Deal controls fifteen years later—with some of the same controllers not only involved, but elevated to higher positions with more authority.
• The impact of the sharp disinflation of 1920–22—the last “business cycle” of the nineteenth-century type—which aroused so much “compassionate” reflationary advocacy, so much wage-maintenance sentiment, and so many gloomy forecasts for the 1920s as it apparently did.
• How the Vedder-Gallaway conclusions fit with the argument offered by many Keynesians that if downward wage and price flexibility had continued after 1932, it would have led to “hyperdeflation”—an accelerated version of the 1865–96 deflation—rather than to economic recovery.
• The significance of the Vedder-Gallaway model for the role of monetarism in economic thinking.
• Their handling of the World War II (1940-46) era, when scarcities and black markets obscured the meaning of published consumer prices and real wages, and the composition of the national output changed in ways that cast doubt on the comparability of productivity estimates for those years with similar data for earlier and later periods. The easy and natural escape from these difficulties for many statistical analyses has been to omit some or all of these war years from their time-series regressions and correlations. Vedder and Gallaway, however, are bold enough to adjust them and include the war years, which indeed seem to fit quite well.
• The relationship between the Vedder-Gallaway model and what is called the “rational expectations” or the “new classical” approach to macroeconomic theory, a topic they confront directly in the technical appendix to the book.
• Why “Black Monday” (October 19, 1987), the Wall Street mini-crash, had few, if any, perceptible employment effects, contrary to the expectations of many contemporary “doomsters.”
• How well the conclusion will stand the test of time. Will the Vedder-Gallaway estimating equations be accurate in future years? By the turn of the century we can anticipate an answer to that question.
In conclusion: Not only is this investigation completely “legitimate” on both economic and statistical fronts, but it is well worth repeating, possibly in modified form, for other market economies. Such repetition would test any hypothesis of American exceptionalism. At the same time, as already noted, another decade or two will test the robustness and stability of the authors’ daring estimating equation for unemployment as a function of real-wage rates current and lagged, adjusted for productivity changes but independent of aggregate demand considerations.
In short, this book is both fascinating and insightful, and should be read by all who have an interest in the issue of unemployment.
MARTIN BRONFENBRENNER
Kenan Professor of Economics (Emeritus) Duke University
NOTES
1. Edwin Cannan, “The Demand for Labour,” Economic Journal 42 (1932): 367.
2. The meaning of this term is vague, perhaps necessarily so. I envisage it as a quasi-equilibrium rate of unemployment at which excess supply of labor in some trades or some regions is roughly “balanced” by excess demand for labor in other trades or regions—or would be so balanced if “job vacancy” statistics were fuller and more meaningful than they have yet become.
3. True confession: As a high-school and university student in metropolitan St. Louis (1928-34), I numbered myself among those dissidents who regarded wages as a source of purchasing power rather than a cost of production.
4. Lord Keynes himself neither stated nor supported “Keynes’s Law.” Rather, the “law” was devised by others as an implication of Keynes’s underconsumptionist and oversaving views carried to their logical extreme.
Preface to the Updated Edition
In the foreword to the first edition of Out of Work, Martin Bronfenbrenner noted that “another decade or two will test the