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Somewhere about one-third of the way through the twentieth century, the world abandoned an approach to business fluctuations and unemployment that had previously governed human behavior. In the world of economic ideas, the halfheartedly-believed theory that excessive wages were the root cause of unemployment was overthrown. The Keynesian Revolution led the economics profession down an unproductive, destructive path for decades. In our judgment, even today the corrosive impact of the intellectual ferment of the 1930s prevents most students of economic ideas from learning some simple but very powerful verities about the way things work. While the world has increasingly appreciated the power of markets in allocating goods and services, it has failed to grasp that the same market forces work equally well in providing jobs for those seeking them.

The Keynesian Revolution’s influence, however, was not simply confined to misguiding a few academics. It provided the intellectual cornerstone for an alteration of the role of the state in modern society. It led to profound public-policy changes. It unleashed a world of unrelenting inflation, continuing budget deficits, and increased governmental intervention in previously private decisions involving resource allocation and income distribution. It inflamed a politics of envy and ultimately slowed the great economic engine that had propelled the American economy to becoming the mightiest in the world.

This book is about these intellectual and policy shifts as they relate to a great concern of citizens of the twentieth century, namely, unemployment. First and foremost, this book is a history of changing unemployment patterns in the United States, written from a labor-market perspective. Second, it is a critique of public-policy developments that have shaped that labor market and impacted on unemployment. It develops the thesis that the state has increased, not decreased, the magnitude of unemployment in this country, that macroeconomic manipulations of a monetary and fiscal nature have ultimately proved unsuccessful, and that the invisible hand of market forces has done a reasonably good job of providing jobs and incomes for Americans.

The research that led to this book began well over a decade ago. We wrote a little unpublished paper suggesting that unemployment variations in the United States could be nicely explained by using a neoclassical model stressing money wages, prices, and productivity. While we were given some early encouragement (most memorably by Martin Bronfenbrenner), the standard academic journals did not seem interested in our simple (too simple, in their opinion) yet powerful exposition of changing unemployment patterns over a large sweep of contemporary history. We presented the paper to various university audiences, at the Duke-North Carolina-NC State Research Triangle Economic History Workshop, Indiana University, the University of Chicago, and the University of Illinois, among others. The research was furthered by stints by both authors on the staff of the Joint Economic Committee of Congress, where, with the support of Bruce Bartlett and the late Charles Bradford (and indirectly Congressman Clarence Brown and Senator Roger Jepsen) we published (in late 1982) a paper on the “Natural Rate of Unemployment” that incorporated our unemployment model.

In 1983, while spending a delightful and highly productive summer in Palo Alto sponsored by the Institute for Humane Studies and funded by the Liberty Fund, we shared our findings with Murray Rothbard, who encouraged us to write a long paper for the inaugural issue of the Review of Austrian Economics (1987). That formed the nucleus of this book. Another paper (which is the basis for chapter 6), given in 1984 to what is now the Cliometrics Society, furthered our enthusiasm for the project; Donald McCloskey, then editing the Journal of Economic History, was particularly enthusiastic and supportive.

We then wrote a preliminary version of this work, but the pressure of other projects together with other difficulties delayed its publication. In the past year, however, we have returned to the project. The wage framework that is the centerpiece of this volume was used in writing a paper on the post-World War II transition to peace, which Murray Rothbard and Walter Block agreed to publish in the Review of Austrian Economics; Robert Higgs of Seattle University liked that paper, spurring us on further. We began in earnest a thorough revision of our earlier effort. David Theroux, president of the Independent Institute, helped enormously by offering to publish the manuscript.

As Roger Garrison of Auburn University pointed out in an extremely detailed and useful review of the manuscript, this book might be perceived as old-fashioned in many ways. Some will certainly say it is not on the cutting edge of modern economic theory: that the basic theory was espoused decades ago by Austrian economists such as Ludwig von Mises and English classical-neoclassical economists such as A. C. Pigou. For every 1990-era reference on efficiency wages, hysteresis, or real business cycles, there are probably two or three references to what most contemporary economists would consider obscure older works by such unknowns (to them) as W. H. Hutt, Benjamin Anderson, Murray Rothbard, Willford King, or Edwin Cannan.

The statistical analysis primarily uses ordinary least squares regression techniques, which modern econometricians regard as hopelessly primitive. There is no computable general equilibrium (CGE) model here, nor will one find Kalman filters or other such econometric nuances. Yet for other readers, including noneconomists and Austrian economists, there is probably a bit too much empirical emphasis and statistical testing. This is a distinctly low-tech manuscript that may well be scorned both by the devotees of high-tech empiricism, and by the philosophes and praxeologists who prefer a no-tech methodology. Yet we use the approach because it powerfully explains the way the world works in twentieth-century America and is relatively simple to understand, a quality that a majority of economists view with disdain but most Americans still applaud. Further, we feel that, properly interpreted, the arguments presented here are distinctly mainstream in nature and, in fact, represent a pushing back of the frontiers of economic knowledge by providing a broad-based explanation of how business cycles are generated in the United States.

We are indebted to a bevy of persons, including all those cited above. Several students, most recently Emily Stroud and Sam Chamberlin of Ohio University’s Economics Department and David Broscious of its Contemporary History Institute, helped provide historical documentation. Judith Daso’s staff in the government documents room of the Vernon Alden Library at Ohio University was always helpful; we were also assisted by staff at the Stanford University Library and the Library of Congress. John Gaddis has striven to provide a congenial working environment in the Contemporary History Institute. A variety of colleagues and graduate students have offered insight and suggestions over the years. At Ohio University, we have benefited from the comments of three Economics Department colleagues, David Klingaman, Douglas Adie, and the late John Peterson. Equally useful has been our Contemporary History Institute colleague (and distinguished Truman-era historian) Alonzo Hamby. Gene Smiley of Marquette University and Richard Timberlake of the University of Georgia have made insightful suggestions, as have Charles Baird of California State University at Hayward and Terry Anderson of Montana State University.

Other encouragement has come from Fred Glahe of the University of Colorado, Lawrence Kudlow of Bear Stearns, Joint Economic Committee economist Chris Frenze, and Steve Hanke of Johns Hopkins University.

Becky Huff and Angie Cook of the Economics Department at Ohio University provided invaluable secretarial help, as did Hallie Willard of the Contemporary History Institute. The Earhart Foundation indirectly helped with some needed financial assistance. Last, but never least, the project would never have reached fruition without the support of our wives, Karen Vedder and Gladys Gallaway.

We conclude this introduction on a sad note. The person who did the most to publicize our views on the labor market to a broader audience was the late Warren Brookes. Warren was a businessman who turned to journalism in midlife, writing an extraordinarily perceptive column dealing primarily with economic matters. He did as much to further the “supply-side” revolution in the late 1970s and early 1980s as any other person, and more recently he uncovered evidence that devastatingly exposed the true economic costs of new environmental laws and regulations. His untimely death has robbed the world of a great journalist, a superb economist, and, personally, a wonderful friend. We dedicate this book to Warren’s memory.

RICHARD K. VEDDER

LOWELL E. GALLAWAY