Monday, June 11, 2012

Free Markets, Flexibility, and Economic Recovery

Last Friday I was honored to participate in a panel session devoted to discussing my book Foundations of Economics: A Christian View. Four reviewers presented their review of my book and then I responded to the reviewers. The lone financial practitioner on the panel asked that I discuss the long-term picture of US employment – since the recovery we have had has not been a jobs recovery. I responded by saying:
As long as the state continues to intervene in the economy, I am not overly optimistic. We should not expect the employment situation to improve very quickly as long as the state makes it more difficult, more risky, and less economically feasible to hire workers on the one hand, and also pay people not to work on the other.

If, however, the state does significantly reduce its presence in the economy by halting monetary inflation, cutting spending, and reducing business regulation, we would move toward a better outcome. There would be increased liquidation of malinvested capital. There could be increased unemployment in the short run, as increased lay-offs would be likely. If, however, markets for products and labor were kept flexible, workers would more quickly find their way into those occupations that are needed by successful entrepreneurs who are profitable precisely because they are producing what people want. In a free society, unemployment that results from a recession need not be prolonged and especially agonizing. If that does happen, it is a sure sign that the government is not allowing the market to function properly.
These remarks are presently being born out in Spain. Flexibility in labor markets is exactly what Spain needs notes business analyst, Mariano Guindal. One of the main reasons for rigid labor markets in Spain is unionism. He writes:
The unions have enjoyed a social prestige and power that was not seen anywhere else in Europe.They were very politicized and were very protectionist of those who had jobs, but they didn't think about the jobless.
Guindal's point that flexible, dynamic labor markets are important for any sort of real economic recovery echo's Joseph Salerno's reminder that "If we want want laborers and employers to come together to  discover and create value-productive jobs, then the prescription is simple:  leave labor markets alone and let them churn."


  1. Dr. Ritenour,

    As a newcomer to Austrian economics and your blog, which has solidified my interest in the Austrian approach, I have an elementary question pertaining to prices.

    Using the scenario of rising oil prices, isn’t it important to take into consideration an analysis of the denominator in the oil/dollar exchange ratio? I’m making an assumption (perhaps incorrectly) that the dollar should be treated as a commodity just like oil. Accordingly, if the price of oil is rising, could it be argued in certain cases that it’s not wholly a result of increased demand for oil, but rather an increase in the supply of dollars?

    I ask because all explanations regarding rising and falling commodity prices are attributed to supply-demand characteristics for the commodities themselves, but nothing is ever mentioned concerning the other half of the transaction – the dollar.


  2. JB,

    I would say that money supply effect is, in fact, integrated into the supply and demand for oil, particularly through the demand side of the market. That is why monetary inflation makes economic decision making more difficult.

    When the price of oil increases it is ALWAYS the result of an increase in the demand for oil relative to supply (or a decrease in supply relative to demand). The price of oil or any commodity will always be determined by actions of buyers and sellers.

    The question is, in the case of an increase in the price of oil, why is demand increasing? Is it due to an increase in oil relative to other goods? If so, the price of oil would rise while the price of another good would fall because of a decrease in relative demand for the other good. On the other hand, it is possible that demand is increasing because of an increase in the money supply has encouraged people to spend more on goods in general, of which oil is one.

    So, you are correct that there very well could be a link between the supply of dollars and the price of oil, but that link affects the oil market through demand. What you call "supply-demand characteristics" I would refer to as real economic determinants as compared to the money supply as a determinant.

  3. Thank you for the clarification.