'Demand for Labor' Notion:
A Prosperity-Depression Theory by Which Labor
Loses in Boom and
Harry Gunnison Brown
[Reprinted from the American Journal of Economics
Vol. 18, No. 2 (January, 1959), pp. 149-156]
ROBERT L. HEILBRONER relates that when Professor Alvin H. Hansen of
Harvard University (who "behind his back ... was called 'the
American Keynes' ") went "to Washington to testify in the
monopoly investigations ... he turned the committee into a hushed
private seminar," and the chairman told him the discussion was "getting
so interesting" that "we are violating our rules on all
sides." This was because, as Heilbroner expressed it, a "great
current which had carried the capitalist ship along in the past was
petering out, and henceforth progress would have to be made without
the aid of a constant, favoring, urgent stimulus." As to what the
stimulus was: "No one would have been more surprised than Parson
Malthus," for "it was population growth."
Here is the way Hansen himself expresses the matter in Business
Cycles and National Income:
In the Great Depression of the Thirties there occurred for the first
time in American history a drastic decline in the absolute rate of
population growth. Every previous depression had been buoyed up by the
capital requirements associated with an ever larger increment of
population. The decade of the Nineteen Thirties enjoyed no such
stimulus. In the decade of the Nineteen Forties, however, there was a
strong resurgence of population growth, and this in part accounts for
the high level of capital requirements in the years following the
Second World War. The accumulated backlog of capital needs which
confronted the economy after 1945 was in some measure greater by
reason of the large growth in population in the decade of the Forties.
By the same token the decade of the Thirties suffered from a dearth of
investment opportunities, partly by reason of the drastic decline in
the rate of growth.
And a few sentences further on, Hansen says:
After the economy has become adjusted to a rate of growth of around
16 or 17 million per decade, a decline in the rate of growth to less
than 9 million could not fail to chill the outlook for investment. On
the other hand, as we have just noted, the remarkable and unexpected
spurt of population in the decade of the Forties has raised
expectations with respect to profit- able investment outlets.
In these passages, the idea that increase of population increases the
demand for labor is implied rather than directly stated. It is implied
in the assertion that increased population conduces to business
activity as contrasted with depression. And it is implied in the
assertion that even a reduced rate of increase of population tends
towards depression, as compared or contrasted with a "spurt of
But in his earlier book, Fiscal Policy and Business Cycles,
Dr. Hansen is much more forthright, expressing himself as follows:
It has been argued that cessation of population growth
should be favorable to employment, since the supply of new workers
in the labor market would be reduced. But it is easy to show that
population growth, if it occurs in a period of territorial
expansion, raises the demand for labor more than it raises supply.
Thus, the volume of expensive investment associated with the net
addition of one worker involves capital outlays on a house,
amounting to, say, $4,000, and outlays on plant and equipment
amounting to an additional $4,000. Eight thousand dollars of
investment represents a far greater effect on the demand for labor
than the effect on supply of one additional man-year of labor.
Before commenting on the main idea in the above pronouncement, we
might ask what important difference it makes, if any, in Hansen's
conclusion, whether or not population growth "occurs in a period
of territorial expansion." The argument as it is stated in the
succeeding sentences seems to be completely independent of the
qualification, and such that it should stand or fall, if it has any
meaning, regardless of "territorial expansion."
As a preliminary to discussion of the contention about the "demand
for labor," it will perhaps help to make the discussion more
realistic in relation to contemporary wage rates, if we reckon the
capital outlays on the house as $8,000 and on plant and equipment as
$8,000. For the price level is today approximately double what it was
when Hansen's book was published. Then the last sentence would read: "Sixteen
thousand dollars of investment represents a far greater effect on the
demand for labor than the effect on supply of one additional man-year
The "Demand for Labor" Notion
THE PHRASEOLOGY seems to indicate-for perhaps we should reckon wages
for "one man-year of labor" as about $4,000 to $5,000-that
the addition to "supply" of one man-year of labor makes an
addition to "demand" of three or four times that-of three "man-years"
or four "man-years" of labor. But then we may reasonably
ask, I think, why Hansen should set one man-year of labor in added "supply"
of labor, over against $16,000 of investment as added "demand"
for labor. Why not assume, instead, one man-decade of labor, one
man-month of labor, one man-day of labor, one man-hour of labor or one
man-minute of labor? We can but wish that Professor Hansen had
explained for us just why $16,000 (or $8,000 in terms of 1941 prices)
of "investment" should be associated with, com- pared with
or in some sense equated with one man-year of labor. Is it because one
man-decade of labor (for example) might look like an excess of supply
of labor over demand instead of vice versa?
Economists have many times insisted that demand is not merely desire
but depends on purchasing power. Why does not Hansen tell us
precisely how "one additional man-year of labor" provides
the purchasing power for a demand amounting to $16,000 (or $8,000 in
1941 prices) ? There is, too, no sign of understanding, in the quoted
passage, of how capital comes into existence through saving. Those who
wish to invest in the construction of capital must save, i. e., deny
themselves consumable or "present" goods. What they might
have spent for such present goods can then be spent for capital or for
the construction of capital. There is here no increase in demand for
goods in general but merely an increase for capital balanced by a
decrease in demand for consumable goods. Of course, an increase in the
volume of circulating medium may increase the demand-at current
prices-for goods in general and may thus bring about a rise in the
It may, indeed, be easy to say, but certainly is not "easy to
show," that "population growth . . . raises the demand for
labor more than it raises supply."
We might add that demand for labor is commonly supposed, by
economists, to have some relation to the productivity of labor. (An
employer will seldom knowingly agree to pay a worker more than he
believes the worker will add to what is produced.) Hansen seems to
write, here, as if demand for labor depended on the housing and
machinery "needs" of the laborers!
There is a wealth of evidence to show that most human beings have
enough unsatisfied wants so that, if for any reason they do not need
or want goods of a particular kind, such as houses, they will buy
other goods -- more and better clothing, motor boats, electric
refrigerators, musical instruments, books and newspapers, more and
better furniture, etc. Or they will enlarge and beautify the houses
they have. Or they will spend more in educating their children. Or
they will invest more in the purchase of productive capital.
Those who do not have any desire to spend money, if there are any
such, will presumably not work to earn money, and the quantity of
goods produced to sell will therefore be lessened. If the population
becomes smaller, the volume of goods produced will presumably be
smaller. In any case, the assumption that if and because men do not
want more or larger houses, therefore they will probably spend less in
any appreciable degree -- i.e., that they will have an appreciably
greater tendency to hoard their money -- and therefore bring a
substantial decrease of demand for goods in general, is utterly
gratuitous. And in the absence of such an assumption, the entire
argument has no significant relevancy.
If Hansen is to make a case for the view that a declining rate of
growth in population generates unemployment because of some
consequential disinclination to invest, he must show that that
disinclination to invest is not balanced by a corresponding
inclination to spend. In other words, he must show that there is an
appreciably greater tendency to hoard. Without such an assumption of
increased "liquidity preference" and, therefore, increased
hoarding, the argument that depression and unemployment must ensue
loses all its plausibility.
Furthermore, in the light of the facts antecedent to and leading into
the Great Depression of the Nineteen Thirties, the assumption that the
initiatory force was hoarding, is unjustified. There was Federal
Reserve credit restriction, beginning as early as the spring of 1928.
And this restriction was accentuated in 1929 despite a level of
wholesale prices already lower in the early part of 1929, prior to the
stock market crash, than in 1928.' There was a great decrease, in the
early Nineteen Thirties, of the volume of circulating medium. The data
assembled by Dr. Clark Warburton seem to indicate that changes in
the velocity of circulation "are typically sequential in time to
deviations in the quantity of money from its normal upward trend and
are in the same direction." Entry into the depression, says
Warburton, "was led by failure of the money supply; after the
shortage of money had made itself felt ... declining use of money was
a powerful intensification factor deepening the depression." Why,
then, should we assume that "liquidity preference"-or "hoarding,"
or declining velocity of money--itself stemming, supposedly, in large
degree from a declining rate of growth of population, was a
significant initiatory cause, or even in any degree an initiatory
cause, of the depression and of unemployment?
Let us temporarily ignore, however, all these flaws in Hansen's
reasoning and in his assertions, and accept provisionally, more or
less on faith, his view that increasing population "raises the
demand for labor more than it raises supply."
But to say that increased population thus increases demand for labor
more than it increases supply, is to imply that decrease of population
decreases "the demand for labor" more than it decreases
supply. And, as we have seen, Professor Hansen seems to look with a
jaundiced eye even on increase of population, whenever the increase is
at a substantially decreasing rate. Thus, if population does not
increase, and at a sufficiently rapid rate, so that there is a
relatively great desire-or "need?"-for new housing,
industrial plant and equipment, the resultant lack of stimulus to such
investment may (in Hansen's view) so decrease demand for labor as to
bring about serious unemployment.
On the other hand, if population increases so fast as to make
possible (again, in Hansen's view) relatively full employment, this is
just because of the scarcity relative to population, of housing, plant
and equipment. Thus these employed workers are nevertheless not so
well provided, per worker, with either capital or land. The
productivity of their labor thus tends to be lower and their wages
must, therefore, be relatively low. In other words, labor can't win in
either case. Labor must be, in the one case, to a large extent
jobless; and it must, in the other case, be relatively unproductive
and accept relatively low wages!
Could it perhaps be that Hansen would deny this and contend that with
his putative high "demand" for labor, workers would have
higher wages at the very time they were ill provided with capital;
might he contend, that is, that wages have no special relation to the
productivity of labor! Although Hansen's treatment of this matter
differs superficially from that of Keynes, particularly in Hansen's
argument about "demand for labor" in relation to "supply
of labor," there seems to be substantial similarity in their
For Keynes contends7 that accumulation of wealth can be, and has
been, so large as to bring the "marginal efficiency of capital"
down more rapidly than the "reward required for parting with
liquidity" can be brought down. And he contends that, "in
conditions mainly of laissez faire," this "can interfere . .
. with a reasonable level of employment." Indeed, he seems
clearly to attribute depression and unemployment in Great Britain and
the United States during the post World War I period, largely, if not
entirely, to this. Thus, Keynes too is saying that when capital
equipment is plentiful so that labor, being well supplied with
capital, has high productivity and might reasonably expect, therefore,
to earn high wages, it is likely to be in substantial degree
unemployed. And this is supposed to be the consequence of a "liquidity
preference" which inhibits investing for the low returns
realizable when capital is so plentiful.
In Keynes' approach, returns on capital are so low as to discourage
in- vestment, because there has come to be so large an accumulation of
capital -- presumably in proportion to the number of workers. In
Hansen's approach, returns on capital are so low as to "chill the
outlook for investment," because the population-and, therefore,
the number of workers -- has increased so little; in other words, the
amount of capital in proportion to the number of workers, is great.
With both Keynes and Hansen, the large amount of capital per worker,
tends to bring about decreased investment and decreased employment.
On the other hand, in the Keynesian theory as well as in Hansen's,
labor has a better chance for employment when capital is relatively
scarce, i.e., when workers are less well provided with plant and
equipment and when, therefore, the productivity of labor is relatively
low. Keynes does not, indeed, comment meaninglessly on "man-years
of labor." But he certainly takes the position that when "the
marginal efficiency of capital" is high -- which is when capital
is relatively scarce -- "liquidity preference" is less
likely to manifest itself in an excess of hoarding; and there is less
likely to be unemployment. When capital is scarce, would-be wage
earners can have jobs. But when capital is scarce, workers must be
less well equipped with capital and their productivity (in the
terminology of economics, "marginal productivity") must be,
other things equal, lower. Hence their real wages must be relatively
low. In short, with plentiful capital and high productivity of labor,
jobs must be scarce; while with scarcity of capital and low
productivity of labor, though there may be jobs, real wages must be
low. In the Keynesian philosophy -- as in Hansen's philosophy -- labor
loses either way.
Tax Incentives for Saving and Investment
BUT THERE IS A WAY of dealing with the alleged independent and
initiatory cause of depression envisaged by Keynes and Hansen
--assuming it to be such a cause -- which neither of these economists
has apparently thought of. It is a method which would, at the very
worst, give us a reprieve from the evil fate they warn us of. And even
if we suppose that it could not, of itself, assure us of perpetual
freedom from business depression and un- employment, it would provide
enough gain to our economy to be very much worth while.
Both Hansen and Keynes emphasize as an important causative factor in
the initiating of depression, a general unwillingness to invest.
Keynes refers specifically to the inhibitory effect of liquidity
preference when large investments in capital have brought the "marginal
efficiency of capital" to a low percentage, e.g., 2 or 2-1/2 per
cent. Hansen, as we have seen, regards large increase of population as
a stimulus to investment, and decrease or unusually slow increase of
population as retarding investment. Hansen must be assumed, therefore,
to have a low "marginal efficiency of capital" in mind, in
the latter case, as the proximate cause of the lack of new investment,
a lack which, in his thinking, brings business depression.
But the returns which motivate investors are the returns they
anticipate will come to them. It is not the per cent "marginal
efficiency of capital" in adding to output which concerns them,
but the per cent which comes to them personally. In other words, they
invest for what is left after the yield of capital has been tapped by
the community or state for the public exchequer. When Hansen says that
population has not increased enough to make additional capital seem
worth constructing and when Keynes says that capital has increased so
much that its "marginal efficiency" is too low to overcome "liquidity
preference," they must both have in mind a sequential small yield
to investors. And this percentage of yield would be much larger if
capital were not taxed.
If, therefore, we were to untax capital and draw sufficient
additional revenue to make up the loss, by heavier taxes on the
geologically-produced and community-produced value of land, this would
certainly provide a greater reward to those who save and invest in
capital. If it is really true -- as both Keynes and Hansen
contend-that the lack of an adequate gain on investment leads to
business depression and unemployment, and if by such a change in tax
policy we can decidedly increase that gain, what are the overriding
arguments against our doing so?
On the theory that it could, just conceivably, come about in some
later decade or generation or century, that the return on capital to
investors -- even though untaxed -- would be so low as to greatly
increase liquidity preference and thereby initiate depression, such
depression would still not be inevitable. An appropriate monetary
policy could both satisfy-satiate, if necessary-liquidity preference,
and provide enough additional purchasing medium to maintain the demand
for goods and labor.
The change in tax policy here suggested would yield definite and
substantial benefits, even though not needed at all to give us a
reprieve from any depression generated in the way or ways Hansen and
Keynes describe. The heavier tax on community-produced land values
would lessen the waste of holding good land out of use for
speculation, as it has lessened such waste in parts of Australia where
such a tax system is employed. Labor would be better supplied with
land, the productivity of labor would be greater and real wages would
be higher. With lower land rent, the cost of housing to tenants would
Both cogent theory and available statistical data from Australia
indicate that the larger percentage of gain to investors in new
capital would bring about more capital construction in the
communities, states and nations where this tax policy was followed.
Thus, labor in them would be better provided with capital as well as
better provided with land. For this reason too, then, the productivity
of labor would be greater and wages would be higher. Why should not
followers of Hansen and Keynes join in urging this reform? On the
basis of their explanations of how business depressions are or may be
brought about, such a tax policy would be a definite help in
preventing them -- or, at worst, delaying them. On the basis of their
own hypotheses, it would offer threatened humanity at least a reprieve
and perhaps a long-even an indefinitely long! -- reprieve. Why do they
ignore it? Do some of them fear, perhaps, that to express approval of
a land-value-tax policy might make them professionally declasse? Or
has it really never occurred to any of them that the possibility of
land-value taxation has any bearing whatever on the adequacy or the
correctness of the Keynes-Hansen analysis?
FOOTNOTES AND REFERENCES
- In The Worldly
Philosophers, New York, Simon and Schuster, 1953, pp. 289-90.
- New York, W. W. Norton, 1951,
- New York, W. W. Norton, 1941,
p. 41, footnote.
- This and the next four
paragraphs are taken, with only slight changes, from my Basic
Principles of Economics, 3rd ed., Columbia, Mo. (Lucas
Brothers), 1955, Vol. II, p. 179, beginning with footnote and
following with text.
- Basic Principles of
Economics, op. cit., Vol. II, pp. 160-3, especially 163.
- In "Monetary Velocity and
Monetary Policy," Review of Economics and Statistics,
30 (November, 1948), especially p. 309. See also his "Bank
Reserves and Business Fluctuations," Journal of the
American Statistical Association, 3 (December, 1948). Even if
one is not convinced by Warburton's data here cited, that
declining velocity of circulating medium is "sequential"
to "failure of the money supply," Hansen's view that a
decreasing rate of population growth generates unemployment
remains equally implausible. Thus, some may contend that, with
many borrowers, an increased interest rate charged by banks could
bring about a cautious slowing down of their expenditures for
goods and labor even before it reduced their borrowing. Having
intended to borrow a certain amount in October, such a potential
borrower might, recognizing the "tightness" of credit,
slow down his expenditures in September in anticipation of
borrowing less in October, than he would borrow had the bank rate
remained low. But on this assumption, too, it is bank policy, and
not a declining rate of population growth, that has decreased the
demand for goods and for labor.
- The General Theory of
Employment, Interest and Money, New York, Harcourt, 1936, p.
219 and, for "definition of the rate of interest," p.