Wages, prices, and employment: Von mises and the progressives

Abstract

T here was a watershed in the history of economic ideas in the twentieth century, particularly ideas dealing with the relationships, in the aggregate, between money wage rates, price levels, and employment. This watershed occurred not quite a third of the way through the century and was derivative from the dramatic sequence of events known as the Great Depression. Economic thinking, in general, has never been the same since those years, especially in the United States, where, between 1929 and 1933, the unemployment rate rose from 3.2 to 24.9 percent, while output, in real terms, fell by about one-third. 1 Because of these developments, the Great Depression is often cited as a classic example of the failure of a capitalist economy to provide full employment of its resources, especially labor. Not surprisingly, that alleged failure triggered one of the most vigorous debates in the history of economic affairs, a debate that can be understood more fully if it is considered in the context of the state of thinking about the causes of unemployment on the eve of the Great Depression. As the decade of the 1920s wound down, the dominant explanation for the occurrence of unemployument was the classical one, perhaps best represented in the writings of the British economist A.C. Pigou who, in his Industrial Fluctuations (1927), states that sufficiently flexible wages would "abolish fluctuations of employment altogether. ''z Even more explicit (although published in 1933 after the onset of the depression) is a passage from his Theory of Unemployment in which he argues: