Marx's Reserve Army vs. Phillips Curve: Unemployment and Inflation

Introduction: Defining the Theories

Karl Marx's concept of the Reserve Army of the Unemployed, outlined in Capital, describes the working population as a variable ingredient in the composition of capital. Marx theorized that increases in capital required increases in labor, but in consistently diminishing proportion. Critically, he observed that capitalists maintained a need for a pool of unemployed labor to keep wages low.1

The Phillips Curve refers to British economist A.W. Phillips's 1958 theory proposing a relationship between unemployment and inflation. One version of the theory suggested that "policymakers could permanently lower the unemployment rate by generating higher inflation." This appeared valid at the time but was challenged nine years later as the economy evolved. The theory is under further scrutiny today and is considered by some to be unreliable for contemporary economics.

The second important unemployment concept is the Non-Accelerating Inflation Rate of Unemployment, or NAIRU. This is the unemployment rate consistent with maintaining stable inflation. According to standard macroeconomic theory, inflation will tend to rise if the unemployment rate falls below the natural rate. Conversely, when the unemployment rate rises above the natural rate, inflation tends to fall. Thus, the natural rate and NAIRU are often viewed as two names for the same thing, providing an important benchmark for gauging the business cycle, inflation outlook, and appropriate monetary policy stance.

Similarities Between Marx and Phillips

Capitalists in Marx's world kept wages low by supporting policies that caused unemployment and the growth of a large labor pool. Examples include the use of child labor and women workers in mills and mines. This oversupply of workers forced them to compete against each other for wages, often maintaining subsistence-level earnings. Mine owners had such a free hand that safety was only a concern when production itself faced interruption.

Governments subscribing to Phillips Curve theory also controlled unemployment but through different mechanisms: encouraging immigration to swell the labor pool, implementing wage and price controls, and passing laws favorable to the ruling class. In these eras, women lacked voting rights and were considered property.

During Marx's lifetime (1818–1883), labor migration from countryside to urban centers became clearly recognizable as pools of labor swelled city centers during the Industrial Revolution. The ruling class, who owned machinery and factories, could manipulate economic forces controlling national wealth. Decisions such as which products to export were of great interest and benefit to governments, many of whose members belonged to the ruling class.

Similarly, Phillips Curve theory involved government intervention and monetary policy manipulation, which could include changing interest rates (to attract or repel investment), taxation on people and products, and tariffs on imported goods—all mechanisms to manipulate national wealth.

The ranks of the Reserve Army swelled as the Industrial Revolution progressed. As new machines displaced workers, reducing production costs and increasing productivity, the ruling class grew richer. Capitalists could choose to maintain increased profits from decreased labor costs, or to purchase more machines operated by the same workforce at identical overhead costs but generating larger profits. By continually increasing profits, they could purchase even more machinery and expand their workforce.

In this way, capitalist business policies exerted great control over the economy, similar to government monetary policies under Phillips Curve theory.

If the army of labor became too small, the price of labor increased and consequently production costs rose. Increased commodity costs gave rise to inflation. This mechanism operates identically in both theories and remains true today.

Both theories were proven correct at the time of their announcement. Marx's theory of Surplus-Value was greeted with scholarly respect, albeit subdued, since it was unpopular with industrial owners. The Phillips Curve was based on statistics gathered between 1861 and 1957. A.W. Phillips published his theory in 1958 and statistics initially proved him correct, although nine years later, in 1967, economists Edmund Phelps and Milton Friedman challenged his theory. They argued that any trade-off would be short-lived because people would come to expect higher inflation and that monetary policy alone could not maintain unemployment below its natural level (equilibrium). More recently, the Phillips Curve has been questioned and is considered unreliable by many economists.

Marx's theory of the capitalist need for a Reserve Army of the Unemployed is no longer valid in general terms. In most industrialized nations, there exists an unfortunately large surplus of unemployed workers. What has changed is the skills required of those workers. Every nation now faces a shortage of workers with ability to create or use the latest technology.

Similarly, Phillips Curve theory is no longer valid since no one seems to know what the natural level of unemployment really is, and neither inflation nor unemployment can be reliably predicted to affect each other. There is strong opinion that it is "time to ditch the NAIRU."

Both theories were developed based on the economy and culture of Great Britain. The class system in Great Britain when Marx and Frederick Engels wrote the Communist Manifesto was abhorrent to both and vastly different from today. The British class system has since changed, becoming less aristocratic and more mercenary. Similarly, economic reality has shifted; power has been transferred from the landed gentry and aristocracy, with even the monarchy now subject to taxation.

Both systems operate under control by the ruling class. In the Reserve Army theory, the ruling class directly controls unemployment. In Phillips Curve theory, the ruling class (through government and central banks) controls the monetary and fiscal systems that regulate unemployment. This social upheaval has persisted for centuries and continues today in developing countries.

The main common denominator is the desire for wealth—or more wealth—expressed as greed. Capitalists seek profit, and governments, despite their claims to voters, want capitalists to profit. Government dictates monetary and fiscal policy with money-making as a primary concern: funds are needed to pay for obligatory services, to provide additional services to win voter support and remain in power, and to sustain political parties themselves. All these actors share the underlying motivation of accumulating wealth and power.

Both were theories rather than descriptions of observable fact. Marx considered his theory of Surplus-Value his most important contribution to economic analysis. The Phillips Curve was also based on theory, constructed upon the expected rate of inflation, which itself was grounded in "adaptive expectations"—the idea that people based their inflation expectations on past inflation levels.

Differences in Scope and Administration

Marx's observations focused on manipulation of society—child labor, and particularly the absence of and active resistance to safe working conditions. This contrasts sharply with Phillips Curve theory, which addresses manipulation of monetary and fiscal policy rather than direct social manipulation.

During Marx's lifetime, the described manipulation was carried out by many people within a single class—the Capitalists or ruling class. The Phillips Curve, by contrast, refers to government policy administered by a limited number of individuals within government and the civil service.

Marx's theory of Surplus-Value and the role of the Reserve Army is relatively simple: the army provided labor when needed for capital expansion and, by existing, kept wage costs down. Phillips Curve theory involved monetary and fiscal policy, which was and remains far more complex, administered through multiple mechanisms: taxation, immigration policy, bank rates, and numerous other tools.

The two theories emerged at different moments in Britain's economic evolution. Marx's Communist Manifesto was written when the trade union movement had only just begun. There was no significant pressure on industrial leaders to improve workers' conditions. Work days ran from eight in the morning to eight in the evening. Parents forced children of all ages into labor; the average starting age was six years, and in the lacemaking industry, children as young as two and a half years old were employed in "lace schools." International trade unions did not gain strength until the late 19th century, followed by national unions.

By the time Phillips proposed his theory in 1958, unions had become much stronger, with national unions forming international ties. This union cooperation across borders shifted the balance of economic power compared to Marx's era, fundamentally altering labor-market dynamics.

Marx's description of the Reserve Army of the Unemployed was part of his larger work on exploitation of the working class by the ruling class—more a social statement than applied economics. Either he used his theory of Surplus-Value to prove exploitation, or exploitation was integral to Surplus-Value theory itself. No such alternate motives can be attributed to A.W. Phillips, who was an economist focused on measurable economic relationships.

Wage Theory and Capital Accumulation

It is paradoxical that Karl Marx, capitalism's staunch opponent, identified even in the mid-19th century the potential for wage increases under capitalism, albeit limited in time and space. Marx stressed that for individual capitalists, wage increases paid by competitors represent increases in potential purchasing power, not increases in costs. Marx distinguished two elements in workers' wages: the reproduction costs of labor power.

The first element is physiological—calories and energy—establishing a floor below which wages cannot fall without destroying labor capacity. The second is historical-moral, consisting of goods and services gained through class struggle, such as improved working conditions or paid holidays. This second element is flexible, varying by country, continent, and era according to many variables. Its upper limit is indicated by the ceiling at which profits threaten to disappear, prompting capitalists to cease investment.

Marx's wage theory is fundamentally a capital-accumulation theory, rooted in what he considered capitalism's first "law of motion": the compulsion for capitalists to constantly increase the rate of capital accumulation. This framework reveals that wage dynamics cannot be separated from broader patterns of investment and productive capacity expansion.

Conclusion: Historical Validity and Modern Applicability

Both theories were developed based on the economy and culture of Great Britain and remain grounded in their historical moments. Marx's analysis emerged during early industrial capitalism when labor organization was nascent and worker protections nonexistent. Phillips's framework was constructed during the post-war era of relatively stable inflation and strong unions, conditions that no longer universally prevail. Contemporary economies, characterized by globalization, technological displacement, and fragmented labor organization, present conditions neither theorist anticipated. While both theories illuminate important mechanisms of wage and inflation control, their prescriptive value for modern policymakers remains questionable. The search for reliable unemployment-inflation trade-offs and natural rates of unemployment continues, yet the simple frameworks of either Marx or Phillips provide insufficient tools for managing 21st-century labor markets.