Employment

By: Sharon White
Submitted: 2007-01-17 16:25:27
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Under-employment results in under-consumption combined with under-investment caused by the extremely high a rate of interest. Theoretically, it is possible to influence both these factors. Under-consumption is due in large measure to the fact that many consumers are limited in the satisfaction of their needs by too small an income, while a minority do not consume the whole of their incomes. In a way, the inequality of wealth, which is the cause of hoarding, explains under-consumption. In theory, there are several ways of equalizing incomes. We may transform the structure of society, for example by expropriating large estates and redistributing them amongst landless cultivators. We may also restrict profits by price control and the limitation of profit margins. Or wages can be raised by government decree. We can, by the same means, reduce private debts, on the assumption that creditors, being richer than debtors, consume proportionally less. But there is another way of equalizing incomes without tampering with the economic structure: taxation. The political and social development of the nineteenth century revealed the possibility of correcting the inequality of wealth by means of taxation. Systems of graduated income taxes and estate duties, if not capital levies, were drawn up with this end in view.

From the middle or the end of the nineteenth century, therefore, taxation appeared not only as a means of obtaining resources for the treasury, but as a weapon of social reform. The Keynesian analysis leads to the recommendation of an equalizing tax not so much in order to distribute wealth more equitably, as to ensure economic equilibrium by developing consumption. In similar fashion, indebtedness can be reduced without modifying contracts in a formal way, simply by raising prices. Any policy of raising prices implies some transfer of income from creditors to debtors, and consequently tends to increase consumption. The influence upon private investment is limited. If graduated taxation goes beyond a point, it is likely to discourage enterprise and, consequently, investment. Moreover, in a society in which wealth was fairly equally distributed and the standard of living relatively high, the propensity to invest might not balance the propensity to save. Investment can be influenced by the state in different ways. Private investment depends on the relation between the prospects of profit and the rate of interest. The state must first see that the prospects of profit are not diminished by a prolonged fall in selling prices. The tendency to a continuous fall in prices will encourage entrepreneurs to avoid any expense that might lead them to produce more, for selling prices might be lower than cost prices and not enable them to pay the interest and depreciation on capital borrowed. If the likelihood of a fall in prices is great, any reduction in the interest rate may be insufficient to offset the effects.

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