Capitalism, Socialism, and Unemployment

Standing in line, marking time
Waiting for the welfare dime
'Cause they can't find a job
--Bruce Hornsby & the Range

I posed this question to my students recently. What should be the theoretical employment level under capitalism and socialism? Under capitalism, employers and employees are free to negotiate work contracts. Moreover, the dynamics of competitive environments, Schumpeter's creative destruction, will cause some people to be out of work when existing producers are supplanted by innovative approaches of entrepreneurs.

Such unemployment should be temporary, however. Those seeking work (not everyone will) should be able to find it. Under pure capitalism, then, involuntary unemployment should be limited to frictional unemployment--those people transitioning between jobs.

My students and I were pretty much in agreement on this.

On the socialism side, we were also of the general opinion was that unemployment under socialism should be lower than under capitalism. After all, because it makes the production decisions under socialism, government should be able to give everyone a broom if it wants to and call them employed.

After further reflection following our class discussion, however, I am no longer confident that this is a generalizeable rule.

One reason is that the goals of a socialized economic system do not necessarily include full employment. Production decisions may be socialized because a few people sense that they can siphon off wealth from the system at the expense of others. This may be possible if those in control of government can convince people that the current arrangement is in the best interests of all (i.e., for the 'greater good'). Propaganda avenues that make such an approach feasible include a complicit media and public schools.

In addition, if the welfare system is attractive enough, many people will choose not to work--or at least not work up to their capacity. Voluntary unemployment and conditions of underemployment are certain to rise under socialism.

As unemployment and underemployment increase under socialism, the system depends on fewer and fewer workers to support the system. To pay for government programs in a situation where high productivity is discouraged, socialistic systems must increasingly resort to consuming all production and then and borrowing resources from others. As a consequence, savings and productivity decline in vicious circle fashion.

As productivity declines, wages for those who want to work stagnate as well. If government resorts to inflation to fund its social programs, then real wages will decline.

Many people will get discouraged and cease working.

There is an argument to be made, then, that under pure socialism unemployment will not be zero. Instead it will be significant. Moreover, unemployment should trend higher over time as motivation to work declines.

Increasingly, reviews (here and here) of employment and wages reflect trends that are consistent with this argument.

Of course, pushing this logic to completion leads to the Misesian chaos endpoint of socialism.