The Economics Book

157

For a century prior to the
publication of The General Theory,
poverty, rather than unemployment,
was the enduring problem. Until
the 1880s countries such as
Britain and the US, which were
undergoing rapid growth as a
result of the Industrial Revolution,
enjoyed general advances in living
standards, but pockets of grinding
poverty remained.

The idle poor
Economists had long seen poverty
as the greatest social policy issue,
but by the end of the 19th century
the unemployment of workers
began to cause increasing
concern. At first it was thought
the problem was caused by illness
or some defect in the character of
the worker, such as idleness, vice, a
lack of enterprise, or a lack of a
work ethic. This meant that
unemployment was seen as a
problem for individuals who were
for some reason unable to work,
rather than a problem for society in
general. It was certainly not seen
as an issue that public policy
needed to concern itself with.
In 1909, British social
campaigner Beatrice Webb (p.135)
produced The Minority Report of
the Royal Commission on the Poor
Laws. This was the first document
to lay out the concept and policies
of a welfare state, and it claimed
that “the duty of so organizing
the national labor market as
to prevent or minimize
unemployment should be placed

upon a Minister.” The term

“involuntary unemployment” came

into use for the first time. With this

came the idea that unemployment

is caused not by the shortcomings

of individuals, but by surrounding

economic conditions outside of

their control.

Involuntary unemployment

By 1913, the concept of involuntary

unemployment was understood as

defined by the British economist

Arthur Pigou (p.336): it was a

situation where workers in an

industry were willing to provide

more labor at the current wage level

than was being demanded. Even

today this definition would be

regarded as a good representation

of the involuntary nature of

unemployment, in that it suggests

that the workers have been left with

no choice about whether they work

or not. At this time the classical

view of unemployment still

dominated. This held that

unemployment was largely

voluntary, that it existed because

workers chose not to work at the

going wage rate or would rather

be involved in some “non-market

activity,” such as child care. Those

holding this view insisted that

any involuntary unemployment

would be dealt with by automatic

and self-correcting mechanisms

of the free market.

Under the classical view

involuntary unemployment could

not persist for long: the play of

markets would always quickly

return the economy to full

employment. There is evidence ❯❯

See also: Free market economics 54–61 ■ Gluts in markets 74–75 ■ The Keynesian multiplier 164–65 ■
Inflation and unemployment 202–03 ■ Rational expectations 244–47 ■ Incentives and wages 302 ■ Sticky wages 303

WAR AND DEPRESSIONS

Anxious crowds gather on Wall
Street on October 29, 1929, the day the
stock market crashed. Half the value of
US shares was wiped out in a day,
starting the Great Depression.