This file is a short polemical economics essay by Ludwig von Mises, reprinted from Christian Economics in 1961. Its scope is narrow but programmatic: it explains unemployment by relating wage rates to consumer demand, marginal productivity, capital accumulation, union coercion, government intervention, and inflationary policy. Mises’s central thesis is that durable mass unemployment is not caused by the market economy but by attempts to force wages above market-clearing levels.
Mises begins by rejecting the popular view that wage disputes are simply conflicts between employers and workers. Employers, he argues, do not arbitrarily set wages; they are disciplined by consumers through profit and loss. The entrepreneur can pay only what consumers will indirectly reimburse through purchases of final goods. This is the essay’s first conceptual move: wage determination is shifted from bargaining power to consumer sovereignty.
The consumers are sovereign and the businessmen are their servants.
From there, Mises presents the market as a kind of plebiscite in which each purchase helps allocate income. The same worker who earns modest wages may, as a consumer, help assign enormous salaries to entertainers. This is meant to dissolve resentment against employers by showing that wages and salaries emerge from the whole structure of public valuations, not from capitalist whim.
The second movement explains why wages rise. For Mises, the decisive factor is not union pressure or protective legislation, but capital accumulation. When capital per worker rises, labor becomes more productive at the margin, and wages can rise without excluding workers from employment.
Saving and capital accumulation are the very implements of improving the material conditions of the wage earners.
This argument also structures his discussion of “underdeveloped” countries. Mises attributes low wages there to capital scarcity and insecure property institutions rather than to foreign exploitation. Foreign investment, in his account, raises wages by supplying the capital that domestic institutions failed to generate.
The poverty of these underdeveloped nations is not due to natural conditions. It is a result of their bad policies.
The essay’s argumentative center is its account of unemployment. Mises grants that unions and labor legislation are widely credited with shorter hours, higher pay, and improved working conditions, but he calls this a misunderstanding of causation. If wages are pushed above the level corresponding to workers’ marginal productivity, some employment becomes unprofitable. Employers then restrict production and hire fewer workers. The result is not a temporary imperfection but a persistent institutional outcome.
Mass unemployment becomes a lasting phenomenon.
Mises’s most direct conclusion follows immediately: unemployment is not a failure of laissez-faire but of coercive interference with wage formation.
There is no other means to do away with unemployment than to abstain from any government and union meddling with the height of wage rates.
The fourth section turns against Keynesian remedies. Mises argues that inflation can reduce unemployment only by lowering real wages while disguising the reduction through rising prices. He therefore treats Keynesian full-employment policy not as an escape from the wage problem but as an indirect admission of it.
The inflation which he recommended was designed as a clever trick to cheat the workers.
Mises adds that such deception is no longer plausible because workers, unions, newspapers, and households have become “index conscious.” Even apart from its dishonesty, inflation is unstable: if prolonged, it erodes purchasing power, accelerates price rises, and can destroy the currency system.
The essay closes with an anecdote about Thomas E. Elliott, an unemployed steelworker in Wheeling, West Virginia, who proposes attracting employers by accepting lower wages with the possibility of profit-based additional pay. Mises presents Elliott as a practical corrective to both Washington policy and union doctrine: better a job at a lower wage than unemployment at an imposed wage. The ending is deliberately populist, casting a “plain citizen” as wiser than official experts.
Overall, the essay is a compact statement of Mises’s interventionist critique. Its relevance lies in the way it joins price theory, labor economics, monetary criticism, and political economy into a single claim: wages can sustainably rise only through productivity-enhancing capital accumulation, while coercive wage elevation produces unemployment and inflation merely conceals the necessary adjustment.
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