Essays in Liberalism

M.A.; Fellow of Clare College, Cambridge; Lecturer in Economics; Secretary to the Cotton Control Board from 1917-1919.

Mr. Henderson said:—From one point of view the existence of an unemployment problem is an enigma and a paradox. In a world, where even before the war the standard of living that prevailed among the mass of the people was only what it was, even in those countries which we termed wealthy, it seems at first sight an utterly astonishing anomaly that at frequent intervals large numbers of competent and industrious work-people should find no work to do. The irony of the situation cannot be more tersely expressed than in the words, which a man is supposed to have uttered as he watched a procession of unemployed men: “No work to do. Set them to rebuild their own houses.”

But, if we reflect just a shade more deeply, nothing should surprise us less than unemployment. We have more reason for surprise that it is usually upon so small a scale. The economic system under which we live in the modern world is very peculiar and only our familiarity with it keeps us from perceiving how peculiar it is. In one sense it is highly organised; in another sense it is not organised at all. There is an elaborate differentiation of functions—the “division of labour,” to give it its time-honoured name, under which innumerable men and women perform each small specialised tasks, which fit into one another with the complexity of a jig-saw puzzle, to form an integral whole. Some men dig coal from the depths of the earth, others move that coal over land by rail and over the seas in ships, others are working in factories, at home and abroad, which consume that coal, or in shipyards which build the ships; and it is obvious, not to multiply examples further, that the numbers of men engaged on those various tasks must somehow be adjusted, in due proportions to one another. It is no use, for instance, building more ships than are required to carry the stuff there is to carry.

Adjustment, co-ordination, must somehow be secured. Well, how is it secured? Who is it that ordains that, say, a million men shall work in the coal-mines, and 600,000 on the railways, and 200,000 in the shipyards, and so on? Who apportions the nation’s labour power between the innumerable different occupations, so as to secure that there are not too many and not too few engaged in any one of them relatively to the others? Is it the Prime Minister, or the Cabinet, or Parliament, or the Civil Service? Is it the Trade Union Congress, or the Federation of British Industries, or does any one suppose that it is some hidden cabal of big business interests? No, there is no co-ordinator. There is no human brain or organisation responsible for fitting together this vast jig-saw puzzle; and, that being so, I say that what should really excite our wonder is the fact that that puzzle should somehow get fitted together, usually with so few gaps left unfilled and with so few pieces left unplaced.

It would, indeed, be a miracle, if it were not for the fact that those old economic laws, whose impersonal forces of supply and demand, whose existence some people nowadays are inclined to dispute, or to regard as being in extremely bad taste, really do work in a manner after all. They are our co-ordinators, the only ones we have; and they do their work with much friction and waste, only by correcting a maladjustment after it has taken place, by slow and often cruel devices, of which one of the most cruel is, precisely, unemployment and all the misery it entails.

The Causes of Trade Depressions

I do not propose to deal with such branches of the problem of unemployment as casual labour or seasonal fluctuations. I confine myself to what we all, I suppose, feel to be the really big problem, to unemployment which is not special to particular industries or districts, but which is common to them all, to a general depression of almost every form of business and industrial activity. General trade depressions are no new phenomenon, though the present depression is, of course, far worse than any we have experienced in modern times. They used to occur so regularly that long before the war people had come to speak of cyclical fluctuations, or to use a phrase which is now common, the trade cycle. That is a useful phrase, and a useful conception. It is well that we should realise, when we speak of those normal pre-war conditions, to which we hope some day to revert, that in a sense trade conditions never were normal; that, at any particular moment you care to take, we were either in full tide of a trade boom, with employment active and prices rising, and order books congested; or else right on the crest of the boom, when prices were no longer rising generally, though they had not yet commenced to fall, when employment was still good, but when new orders were no longer coming in; or else in the early stages of a depression, with prices falling, and every one trying to unload stocks and failing to do so, and works beginning to close down; or else right in the trough of the depression where we are to-day; that we were at one or other of the innumerable stages of the trade cycle, without any prospect of remaining there for very long, but always, as it were, in motion, going round and round and round.

What are the root causes which bring every period of active trade to an inevitable end? There are two which are almost invariably present towards the end of every boom. First, the general level of prices and wages has usually become too high; it is straining against the limits of the available supplies of currency and credit, and, unless inflation is to be permitted, a restriction of credit is inevitable which will bring on a trade depression. In those circumstances, a reduction of the general level of prices and wages is an essential condition of a trade revival. A reduction of prices and wages. That point has a significance to which I will return.

The second cause is the distorted balance which grows up in every boom between different branches of industrial activity. When trade is good, we invariably build ships, produce machinery, erect factories, make every variety of what are termed “constructional goods” upon a scale which is altogether disproportionate to the scale upon which we are making “consumable goods” like food and clothes. And that condition of things could not possibly endure for very long. If it were to continue indefinitely, it would lead in the end to our having, say, half a dozen ships for every ton of wheat or cotton which there was to carry. You have there a maladjustment, which must be corrected somehow; and the longer the readjustment is postponed, the bigger the readjustment that will ultimately be inevitable. Now that means, first on the negative side, that, when you are confronted with a trade depression, it is hopeless to try to cure it by looking for some device by which you can give a general stimulus to all forms of industry. Devices of that nature may be very useful in the later stages of a trade depression, when the necessary readjustments both of the price-level and of the relative outputs of different classes of commodities have already been effected, and when trade remains depressed only because people have not yet plucked up the necessary confidence to start things going again. But in the early stages of a depression, an indiscriminating stimulus to industry in general will serve only to perpetuate the maladjustments which are the root of the trouble. It will only put off the evil day, and make it worse when it comes. The problem is not one of getting everybody back to work on their former jobs. It is one of getting them set to work on the right jobs; and that is a far more difficult matter.

On the positive side, what this really comes to is, that if you wish to prevent depressions occurring you must prevent booms taking the form they do. You must prevent prices rising so much, and so many constructional goods being made during the period of active trade; and I am not going to pretend that that is an easy thing to do. It’s all very well to say that the bankers, through their control of the credit system, might endeavour to guide industry and keep it from straying out of the proper channels. But the bankers would have to know much more than they do about these matters, and, furthermore, the problem is not merely a national one—it is a world-wide problem. It would be of little use to prevent an excess of ships being built here, if that only meant that still more ships were built, say, in the United States.

I do not say that even now the banks might not do something which would help; still less do I wish to convey the impression that mankind must always remain passive and submissive, impotent to control these forces which so vitally affect his welfare. But I say that for any serious attempt to master this problem, the necessary detailed knowledge has still to be acquired, and the rudiments of organisation have still to be built up; and the problem is not one at this stage for policies and programmes. What you can do by means of policies and programmes lies, at present, in the sphere of international politics. In that sphere, though you cannot achieve all, you might achieve much. To reduce the problem to its pre-war dimensions would be no small result; and that represents a big enough objective, for the time being, for the concentration of our hardest thinking and united efforts. But into that sphere I am not going to enter. I pass to the problem of unemployment relief.

The Scale of Relief

The fundamental difficulty of the problem of relieving unemployment is a very old one. It turns upon what used to be called, ninety years ago, “the principle of less eligibility,” the principle that the position of the man who is unemployed and receiving support from the community should be made upon the whole less eligible, less attractive than that of the man who is working and living upon the wages that he earns. That is a principle which has been exposed to much criticism and denunciation in these modern days. We are told that it is the false and antiquated doctrine of a hard-hearted and coarse-minded age, which thought that unemployment was usually a man’s own fault, which saw a malingerer in every recipient of relief, which was obsessed by the bad psychology of pains and penalties and looked instinctively for a deterrent as the cure for every complex evil.

But, however that may be, this principle of less eligibility is one which you cannot ignore. It is not merely or mainly a matter of the effect on the character of the workmen who receive relief. The danger that adequate relief will demoralise the recipient has, I agree, been grossly exaggerated in the past. Prolonged unemployment is always in itself demoralising. But, given that a man is unemployed, it will not demoralise him more that he should receive adequate relief rather than inadequate relief or no relief at all. On the contrary, on balance, it will, I believe, demoralise him less. For nothing so unfits a man for work as that he should go half-starved, or lack the means to maintain the elementary decencies of life.

But there are other considerations which you have to take into account. If you get a situation such that the man who loses his job becomes thereby much better-off than the man who remains at work, I do not say that the former man will necessarily be demoralised, but I do say that the latter man will become disgruntled. I do not want to put that consideration too high. At the present time there are many such anomalies; in a great many occupations, the wages that the men at work are receiving amount to much less than the money they would obtain if they lost their jobs and were labelled unemployed. But they have stuck to their jobs, they are carrying on, with a patience and good humour that are beyond all praise. Yes, but that state of affairs is so anomalous, so contrary to our elementary sense of fairness that, as a permanent proposition it would prove intolerable. We cannot go on for ever with a system under which in many trades men receive much more when they are unemployed than when they are at work. On the other hand, the attempt to avoid such anomalies leads us, so long as we have a uniform scale of relief, against an alternative which is equally intolerable. Wages vary greatly from trade to trade; and, if the scale of relief is not to exceed the wages paid in any occupation it must be very low indeed. That is the root dilemma of the problem of unemployment relief—how if your scale of relief is not to be too high for equity and prudence it is not to be too low for humanity and decency. We have not, as some people imagine, done anything in recent years to escape from it, we have merely exchanged one horn of the dilemma for the other.

In any satisfactory system the scale of relief must vary from occupation to occupation, in accordance with the normal standard of wages ruling in each case. But it is very difficult, in fact I think it would always be impracticable to do that under any system of relief, administered by the State, either the Central Government or the local authorities. It must be done on an industrial basis; each industry settling its own scale, finding its own money, and managing its own scheme. That is an idea which has received much ventilation in the last few years. But the really telling arguments in favour of it do not seem to me to have received sufficient stress.