Firstly, we have to state that "actually existing capitalism" in the West actually manages unemployment to ensure high profit rates for the capitalist class (see section C.8.3) - market discipline for the working class, state protection for the ruling class, in other words. As Edward Herman points out:
"Conservative economists have even developed a concept of a 'natural rate of unemployment' [which Herman defines as "the rate of unemployment preferred by the propertied classes"] . . . [which] is defined as the minimum level consistent with price level stability, but, as it is based on a highly abstract model that is not directly testable, the natural rate can only be inferred from the price level itself. That is, if prices are going up, unemployment is below the 'natural rate' and too low. . . Apart from the grossness of this kind of metaphysical legerdemain, the very concept of a natural rate of unemployment has a huge built-in bias. It takes as granted all the other institutional factors that influence the price level-unemployment trade-off (market structures and independent pricing power, business investment policies at home and abroad, the distribution of income, the fiscal and monetary mix, etc.) and focuses solely on the tightness of the labour market as the controllable variable. Inflation is the main threat, the labour market (i.e. wage rates and unemployment levels) is the locus of the solution to the problem." [Beyond Hypocrisy, p. 94]
In a sense, it is understandable that the ruling class within capitalism desires to manipulate unemployment in this way and deflect questions about their profit, property and power onto the labour market. Managing depression (as indicated by high unemployment levels) allows greater profits to be extracted from workers as management hierarchy is more secure. When times are hard, workers with jobs think twice before standing up to their bosses and so work harder, for longer and in worse conditions. This ensures that surplus value is increased relative to real wages (indeed, in the USA, real wages have stagnated since 1973 while profits have grown massively). In addition, such a policy ensures that political discussion about investment, profits, power and so on ("the other institutional factors") are reduced and diverted because working class people are too busy trying to make ends meet.
Of course, it can be argued that as this "natural" rate is both invisible and can move, historical evidence is meaningless — you can prove anything with an invisible, mobile value. But if this is the case then any attempts to maintain a "natural" rate is also meaningless as the only way to discover it is to watch inflation levels (and with an invisible, mobile value, the theory is always true after the fact — if inflation rises as unemployment rises, then the natural rate has increased; if inflation falls as unemployment rises, it has fallen!). Which means that people are being made unemployed on the off-chance that the unemployment level will drop below the (invisible and mobile) "natural" rate and harm the interests of the ruling class (high inflation rates harms interest incomes and full employment squeezes profits by increasing workers' power). Given that most mainstream economists subscribe to this fallacy, it just shows how the "science" accommodates itself to the needs of the powerful.
So, supporters of "free market" capitalism do have a point, "actually existing capitalism" has created high levels of unemployment. The question now arises, will a "purer" capitalism create full employment?
First, we should point out that some supporters of "free market" capitalism claim that the market has no tendency to equilibrium at all, which means full employment is impossible, but few explicitly state this obvious conclusion of their own theories. However, most claim that full employment can occur. Anarchists agree, full employment can occur in "free market" capitalism, but not for ever (nor for long periods). As the Polish economist Michal Kalecki pointed out in regards to pre-Keynesian capitalism, the "reserve of capital equipment and the reserve army of unemployed are typical features of capitalist economy at least throughout a considerable part of the [business] cycle." [quoted by George R. Feiwel, The Intellectual Capital of Michal Kalecki, p. 130]
Cycles of short periods of full employment and longer periods of rising and falling unemployment are actually a more likely outcome of "free market" capitalism than continued full employment. As we argued in sections B.4.4 and C.7.1 capitalism needs unemployment to function successfully and so "free market" capitalism will experience periods of boom and slump, with unemployment increasing and decreasing over time (as can be seen from 19th century capitalism). So, full employment under capitalism is unlikely to last long (nor would full employment booms fill a major part of the full business cycle). Moreover, the notion that capitalism naturally stays at equilibrium or that unemployment is temporary adjustments is false, even given the logic of neo-classical economics. As Proudhon argued:
"The economists admit it [that machinery causes unemployment]: but here they repeat their eternal refrain that, after a lapse of time, the demand for the product having increased in proportion to the reduction in price [caused by the investment], labour in turn will come finally to be in greater demand than ever. Undoubtedly, with time, the equilibrium will be restored; but I must add again, the equilibrium will be no sooner restored at this point than it will be disturbed at another, because the spirit of invention never stops. . ." [System of Economical Contradictions, pp. 200-1]
That capitalism creates permanent unemployment and, indeed, needs it to function is a conclusion that few, if any, pro-"free market" capitalists subscribe to. Faced with the empirical evidence that full employment is rare in capitalism, they argue that reality is not close enough to their theories and must be changed (usually by weakening the power of labour by welfare "reform" and reducing "union power"). Thus reality is at fault, not the theory (to re-quote Proudhon, "Political economy — that is, proprietary despotism — can never be in the wrong: it must be the proletariat." [Op. Cit. p. 187]) So if unemployment exists, then its because real wages are too high, not because capitalists need unemployment to discipline labour (see section C.9.2 for evidence that the neo-classical theory is false). Or if real wages are falling as unemployment is rising, it can only mean that the real wage is not falling fast enough — empirical evidence is never enough to falsify logical deductions from assumptions!
(As an aside, it is one of amazing aspects of the "science" of economics that empirical evidence is never enough to refute its claims. As the left-wing economist Nicholas Kaldor once pointed out, "[b]ut unlike any scientific theory, where the basic assumptions are chosen on the basis of direct observation of the phenomena the behaviour of which forms the subject-matter of the theory, the basic assumptions of economic theory are either of a kind that are unverifiable. . . or of a kind which are directly contradicted by observation." [Further Essays on Applied Economics, pp. 177-8] Or, if we take the standard economics expression "in the long run," we may point out that unless a time is actually given it will always remain unclear as to how much evidence must be gathered before one can accept or reject the theory.)
Of course, reality often has the last laugh on any ideology. For example, since the late 1970s and early 1980s right-wing capitalist parties have taken power in many countries across the world. These regimes made many pro-free market reforms, arguing that a dose of market forces would lower unemployment, increase growth and so on. The reality proved somewhat different. For example, in the UK, by the time the Labour Party under Tony Blair come back to office in 1997, unemployment (while falling) was still higher than it had been when the last Labour government left office in May, 1979. 18 years of labour market reform had not reduced unemployment. It is no understatement to argue, in the words of two critics of neo-liberalism, that the "performance of the world economy since capital was liberalised has been worse than when it was tightly controlled" and that "[t]hus far, [the] actual performance [of liberalised capitalism] has not lived up to the propaganda." [Larry Elliot and Dan Atkinson, The Age of Insecurity, p. 274, p. 223]
Lastly, it is apparent merely from a glance at the history of capitalism during its laissez-faire heyday in the 19th century that "free" competition among workers for jobs does not lead to full employment. Between 1870 and 1913, unemployment was at an average of 5.7% in the 16 more advanced capitalist countries. This compares to an average of 7.3% in 1913-50 and 3.1% in 1950-70. If laissez-faire did lead to full employment, these figures would be reversed. As discussed above (in section C.7.1), full employment cannot be a fixed feature of capitalism due to its authoritarian nature and the requirements of production for profit. To summarise, unemployment has more to do with private property than the wages of our fellow workers.
However, it is worthwhile to discuss why the "free market" capitalist is wrong to claim that unemployment within their system will not exist for long periods of time. In addition, to do so will also indicate the poverty of their theory of, and "solution" to, unemployment and the human misery they would cause. We do this in the next section.