As President Sarkozy seeks a way to create more employment in France by liberalizing the job market he ought to pause for a few minutes and consider the history of Say`s law in classical economics.
Jean Baptiste Say in his classic work Traité d`économie politique which appeared around 1800 argued that supply creates its own demand. "C`est la production qui ouvre des débouchés au produits`" According to Say then general over-production is impossible even if short term disproportionalities may cause over supply and under demand in certain industries for short periods of time.
This being so thought Say and his classical followers David Ricardo, James Mill and John Stuart Mill, unemployment could always be cured by adjusting wages to clear the temporary glut of workers who could not find jobs at the prevailing wages.
Thomas Malthus to his credit disagreed. Instead he argued that long term unemployment was possible and simple wage cutting was no cure.
But Malthus lost the first round of the argument to the classical school who trumpeted Say`s law. It was not until the Great Depression of the 1930s and the resolute brave work of John Maynard Keynes that Say`s law was overturned and discredited.
The classical laissez-faire dogma of that epoch articulated by writers like Friedrich Von Hayek and the British treasury view had prolonged the misery of the depression until finally in the late 1930s Governments began to change their policies and the second world war proved that Keynes and Malthus had been correct.
What President Sarkozy may not realize is that in the world of economics the old discredited ideas of Hayek, Mill and Say have returned as the new orthodoxy of the age with the work of Robert Lucas, Milton Friedman and other contemporary neo-classical economists. Almost all the leading text books assert a new version of Say`s law. Trade unions, labour rigidities and resistance to wage cutting are the causes of unemployment.
But the truth is that cutting wages does not solve the problem of unemployment because cutting real wages through nominal wage cuts simply reduces aggregate demand for output.`When there is general unemployment a general cut in wages in all industries cannot be assumed to leave demand unaltered, for part of that demand results from spending out of such wages.It is thus likely that a general cut in wages will merely cause a reduction in demand and will not in itself remove unemployment. "(A. Stonier&D.Hague, A text book of economic theory,p.357)
This would only not be true if the wage cuts were precisely matched by an equivalent instantaneous fall in prices. But since many prices are governed by cartels and oligopolies this will not happen and the adjustment may take years if it happens at all.
Furthermore, even if there were an optimal real wage it would be impossible for any group among the millions of market actors in a capitalist society to know how to engineer the correct nominal cuts to arrive at the labour market clearing wage. Simply cutting wages does not accomplish what M.Sarkozy desires. Instead it is much more likely to undermine purchasing power and make it more difficult for domestic aggregate demand in France to buy all that can be produced in a fully employed economy.
The prices of goods produced in Asia under conditions of globalization may well be falling fast enough but not those goods and services produced in France. The result will be to shift production out of France to low wage economies elsewhere.
Donc M. Sarkozy passez svp une heure ou 2 pour relire la discussion de la loi des débouchés de votre M. Say et la réponse de M. Keynes. Vous ne regretterez pas votre investissment
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