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There's a small piece up on mises.org, identifying the two major obsticles to recovery.
From our knowledge of Austrian Business Cycle Theory, a recession can only end once malinvestments have been liquidated and (some) wage rates have fallen to re-employ the unemployed.
Marxists argue however that lower wage rates represent an intensification of the exploitation process, and must be avoided at all costs through strong unions or pro-union legislation.
Keynesian criticisms to cutting wages are a little more nuanced. They contend that cutting wage rates will result in a fall in "demand", or a drop in "spending". This will lead to further drops in demand and further job cuts. According to this doctrine, the economy can be in permament "unemploylent equilibrium" - the economy is in equilibrium but mass unemployment persists.
Unfortunately this is not the case, and what Keynesians describe when they talk about "unemployment equilibrium" is really a huge disequilibrium, where some wage or price is forbidden from falling to its market clearing levels.
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We can study the effects of not permitting wages to fall to their market clearing levels. One such case was the Great Depression. Herbert Hoover persued proto Keynesian solutions to the depression. Rather than allowing wages to fall, he held a series of White House conferences with many industry leaders, convincing them that they had to keep paying high wages so workers could "maintain their purchasing power". Henry Ford even pledged to raise money wages.
Here are the wage figures for 1929-1932:
As we can see, in a time of falling prices, it meant that real wages were rising, thus further aggrivating the unemployment problem.
This policy of preventing a fall in wages ws hailed by John Maynard Keynes as well as union leaders. Herbert Hoover in 1932 said:
"…we might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action. . . . No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times. . . . For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered. . . . They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world."
It was in 1932 when unemployment peaked at 25%. Hoover was clueless to the end, never wondering whether it was his high wage policy that caused mass misery and unemployment.
So to conclude, I'm worried. Very worried about union actions all over Europe aimed at maintaining wage rates. We could be in for a long one.
See: Contents - America's Great Depression, by Murray N. Rothbard in particular The Close of the Hoover Term
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Originally Posted by atlantic
