Libertarians often claim that unemployment rates will be much lower in a libertarian society. According to a friend, the perfect unemployment rate is 2%. He argued with the so-called Phillips curve. If it's lower, the employees will have power to push their wages up, thereby creating inflation. This will again make it harder to export goods abroad.
Is he right?
The perfect unemployment rate is 0%. In a libertarian society, there is no problem with employees having power to push their wages up. What they can't do is to coercively do it. Also, pushing wages up doesn't create inflation, it just may raise demand for goods. And what's the problem with having it harder to export?
No. This person is completely wrong.
No person in one of the following groups can cause inflation: goods buyers and goods sellers. No person in one of these groups can cause/create inflation except if they work for the central bank or a fractional reserve bank: labor buyers, labor sellers, service buyers, service sellers. So only central bankers and bankers that practice fractional reserve banking can create inflation. (Here is where the Monetarists and Austrians agree) Inflation is a monetary phenomena, specifically the creation of money and/or credit in excess of what a free market would create, and there are only two process to create money and or credit: 1. Central Bankers Method: Counterfeiting:Creating money electronically or through printing it. And 2. Fractional Reserve Banking.
Furthermore, no shock can cause inflation, and this includes a shock to the energy supply or natural disaster. In these cases the prices of some goods would rise. But in these cases, people would economise by cutting back on the purchases of all goods, especially those with rising prices and go looking for substitutes. Eventually consumers would adjust their behavior to the new reality and prices of all goods and services would continue their slow downward progression which is their natural progression. We call this deflation where technology reduces the prices of goods and services over time thus increasing the purchasing power of the currency.
ivanfoofoo:pushing wages up doesn't create inflation,
I've heard that a minimum wage will do so. Is that wrong?
ivanfoofoo:it just may raise demand for goods
How so?
Bogart:No person in one of the following groups can cause inflation: goods buyers and goods sellers.
Do you have a reference?
It would probably be more beneficial for you to read literature on the topic and decide for yourself rather then asking question after question without offering any personal insight.
If you are interested in Austrian Economics a good place to start is Henry Hazlitt's Economics in One Lesson. If you enjoy that read I highly recommend Rothbard's Man, Economy, and State for a full treatise on economics.
If you are interested in learning more about Libertarianism then Rothbard's For a New Liberty: The Libertarian Manifesto is probably your best bet. After you finish that read you can further research topics Rothbard discusses in-depth.
These are only recommendations to get you started. Mises.org has an incredible free book collection so information is really only a search away.
If you have any questions about the material you encounter along the way the forums is a great place to discuss it.
alimentarius: ivanfoofoo:pushing wages up doesn't create inflation, I've heard that a minimum wage will do so. Is that wrong? ivanfoofoo:it just may raise demand for goods How so?
A minimum wage can cause wage rises in the short term, and in the mid/long term it creates unemployment. A rise in wages can increase consumption, and that increases the prices of consumption goods. But a minimum wage law doesn't create inflation, it MAY only cause a rise in certain consumption goods prices.How? Well, those workers who weren't laid off their jobs earn more money, and they MAY use it for consumption goods.
No, for the same reason exogenous shocks won't.
Freedom of markets is positively correlated with the degree of evolution in any society...
In a free market, supply tends to equal demand, because the price adjusts so that the market clears. Unemployment is a surplus supply of labor. So unemployment is caused by intervention in the labor market. The most obvious example is minimum wage laws; minimum price controls always create surpluses. So in a libertarian society (no intervention), there will be no unemployment.
Anyone who says that 2% unemployment is perfect has spent far too long looking at graphs and not enough time learning economics IMO.
Government Explained 2: The Special Piece of Paper
Law without Government
In a libertarian society, there WOULD be some unemployment, for example, voluntary, or frictional. But it would be low, and the adjustment period would be faster, as there wouldn't be any labor laws like minimum wages and so on.
Tell your friend that contrary to what he learned in his principles level macro class, nobody really takes the phillips curve seriously anymore. High wages don't cause inflation anymore than high values of capital goods do.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
Truth and Liberty:Anyone who says that 2% unemployment is perfect has spent far too long looking at graphs and not enough time learning economics IMO.
I wouldn't go so far. This guy's reasons seem like BS, but simply because the economy doesn't react instantly to anything, it's not unreasonable to suggest there may be a certain overall surplus of workers, just like occasionally inventory might be in excess. The overall point to drive home is that in a free society if someone is unemployed it is not for lack of work to do, but because of a choice as to what they will and will not do and at what price. It's not so easy to make that case in today's society where the government outlaws certain salary levels.
alimentarius: Libertarians often claim that unemployment rates will be much lower in a libertarian society.
Libertarians often claim that unemployment rates will be much lower in a libertarian society.
Libertarians do not actually claim that this is true. The assumption is that the natural rate of unemployment (structural + frictional) would be lower. Vedder and Gallaway, in Out of Work, make a very convincing case that suggests that greater unemployment and employment welfare has increased the natural rate of unemployment over the decades (decades ago, the natural rate of unemployment was much lower than ~5%). The biggest case for this is that welfare for the unemployed prolongs the period of time one is willing to wait until accepting a new job. Take the following graph:
The graph (drawn to the best of my abilities; I apologize) shows that an individual is willing to wait a certain amount of time before accepting a reservation wage, which is a minimum wage that worker is willing to accept at a certain point in time. The graph isn't perfect, but it explains the basic relationship fairly well. The point being that the more unemployment welfare an unemployed individual is receiving, the less willing that person is to accept a new job at any given wage rate. As a result, people are "voluntarily" unemployed for longer periods of time. The truth is that they are living off the wages of somebody else paying the taxes to sustain them. But, irregardless, the "natural rate" of unemployment is increased. Obviously, the "natural rate" has been distorted.
The libertarian argument is not that the natural rate would be lower, although that is the most likely course. The libertarian argument is that in a free market unemployment would be at its natural rate and that natural rate would not be distorted through any redistribution of wealth. Instead, all those able and willing to work based on their own resources would do so, as there would be plenty of work available.
Now, you may question the availability of work. There is plenty of empirical evidence which proves that economies without minimum wages set above all market prices for different types of labor (general market price is worthless) generally have what can be termed "full employment". A great example is pre-bust China. Wages in China for the average laborer doubled due to the competition between companies to recruit willing workers.
According to a friend, the perfect unemployment rate is 2%.
A "perfect" unemployment rate is impossible to calculate. How can you calculate six and a half billion individual choices consistently through time?
If it's lower, the employees will have power to push their wages up, thereby creating inflation. This will again make it harder to export goods abroad.
This theory has been propagated a bit over the internet:
The bad news is, this is likely to accelerate inflation. Companies will absorb the costs for a time, but eventually they will have to raise prices; and once they start, why would they stop before they hit the maximum the market will bear?
I'm not sure if this was your friend's logic. Another option would be an increase in wages shifts the demand curve to the right (second graph):
They are both wrong, at least when it comes to a free market. There are several things to take into consideration:
1. Cost of production does not dictate price of the final good as much as other factors do. The price at which somebody will buy it for will be decided by supply and demand, not factors of production. Therefore, the company can raise the price, but it's not guaranteed that the product will be bought. As a result, companies with greater productivity, and thus make higher aggregate profits, will survive over those which can no longer afford the costs of production. As a result, generally speaking, increase in wages comes with an increase in productivity.
2. In a free-market, free from a Central Bank, companies would tend to invest in times of high savings (low interest rates). At this point, the "Ricardo Effect" (termed by F.A. Hayek) suggests:
"With high real wages and a low rate of profit investment will take highly capitalistic forms: entrepreneurs will try to meet the high costs of labour by introducing very labour-saving machinery—the kind of machinery which it will be profitable to use only at a very low rate of profit and interest." (Hayek, Profits, Interest and Investment and Other Essays on the THeory of Industrial Fluctuations. Quoted from: Huerta de Soto, Money, Bank Credit and Economic Cycles, p. 330.)
But, doesn't this contradict what I said about increased competition for workers? Although an increase in savings would cause a decrease in demand, and therefore a decrease in the general price level. Although real wages increase, it drives the entrepreneur to replace workers with capital-goods, because of high costs of labor relative to profit. Employment is reabsorbed after this period of investment is over as production invariably increases (this was the entire point behind investing), and there is actually an increase in the demand for labor (necessary to bring about a "natural" increase in nominal wages).
In any case, the point behind #2 is that there is an increase in supply, bringing about price deflation. While at first companies do try to lower cost of labor by employing more capital-goods, ultimately there is an increase in supply (increase in productivity) and therefore there is a general price deflation.
Unemployment statistics are rather useless because they count people who don't want/have to work.
Caley McKibbin: Unemployment statistics are rather useless because they count people who don't want/have to work.
They do to an extent. Total Unemployment = Natural Unemployment + Cyclical Unemployment.
Natural Unemployment = Frictional + Structural Unemployment.
Those who you are reffering to are listed under "natural unemployment".