Solving Unemployment in the U.S.: Adam Smith and John Maynard Keynes

Currently in the US we face a large unemployment problem. According to The Huffington Post, 15 million people are out of jobs and nine million more are involuntarily working part time. We see the dissatisfaction in Washington with this issue as Democrats lost majority in the House just a few days ago. Voters don't understand why jobs are so scarce so they vote against those they believe are in power. They did this same thing to the first George Bush in 1992, Clinton and the Democrats in 1994, and also many Republicans who had supported George W. Bush in 2008. They want results, and they don't know how to get the, so they just keep jumping ship from one side to another.

 

So what do economists say would reduce unemployment? We can glean many helpful insights from Adam Smith, father of free market economics. He found that the real problem was not unemployment, but rather monopolies. He therefore aimed to liberate the energies of entrepreneurial people to create wealth. His goal was for British parliament to stand up to government-sponsored monopolies that in the 18th century kept competitors out of many areas and stifled growth. This can be found by reading his famous book The Wealth of Nations (which never mentions the problem of joblessness in any of its pages...).

John Maynard Keynes is the economist who suggested how unemployment could be attacked. Keynes believed in markets as much as Smith did. He recommended that the British government use market prices not rationing to allocate scarce resources as WWII approached. During the Depression, however, the millions of jobless were a crucial political problem. Keynes argued that waiting for private investors to create jobs as conservatives said Smith would have done could lead to the overthrow of Great Britain's free institutions.

Conservatives were arguing in the 1930s, as they still do in 2010, that cutting taxes and reducing government outlays would create jobs in the "long run." Keynes famously responded that "in the long run we are all dead."

The insights of Smith and Keynes are central to today's debate between the parties. Smith is still right that economic progress depends on liberating the energies of entrepreneurs so that they can create wealth. Government has to pump money into competitive markets to get investment going again. That is what stimulus is, and that is what will boost the economy and get people jobs.