Tuesday, 26 November 2013

Does money exacerbate unemployment?

Paul Davidson (economics prof. at the University of Tennessee) suggests as much. He says (in green):
“… one wants to explain the empirical fact that involuntary unemployment is only associated with money-using contractual economies. In other words, real economies that do not use money and money labor contracts to organize production (e.g., feudalism, slave economies, South Sea Islanders discovered by Margaret Meed, etc) may possess important nonlinearities and even an uncertain future — but there is never an important involuntary unemployment problem. Slaves are always fully employed as well as are serfs in feudalism…….Finally it should be noted that herds of animals, schools of fish, etc organize together to solve the economic problems of What? How? For Whom? Without using money, contracts or markets, these animals still face complex nonlinear problems in their search for food and interaction with other herds. Yet animals never suffer from involuntary unemployment!”
I have doubts. My hunch is that as economies become more complex, barter becomes impossible, so money has to be used. And unemployment rises. But unemployment results from the complexity, not from money I think.
To illustrate with reference to a simple Robinson Crusoe economy… Crusoe lands on desert island where there are about ten families who eat fish, and make grass skirts to wear and mud huts to live in. Crusoe’s speciality is fishing. So he does that, which means the price of fish in terms of grass skirts and huts will drop. But that increases demand for fish, so everyone is employed. (That’s Say’s law at work – at least as I understand Say’s law).
But if the same economy used money, much the same thing would happen: the price of fish would drop, etc etc. You get the picture.
So the introduction of money does not exacerbate unemployment. And here’s another illustration.
Suppose the US or European economies tried to abandon money and employ barter instead, the result would be complete chaos, including (I suggest) far more unemployment than exists at the moment.
Conclusion: money doesn’t exacerbate unemployment. However, complex economies HAVE TO employ money, and unemployment is associated with complex economies.
H/t to Mike Norman.

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