Robert Lucas’ umbrella

16 Aug, 2016 at 13:03 | Posted in Economics | 2 Comments

To understand New Classical thinking about this crucial issue, consider Lucas’s response to the following question: If people know the true distribution of future outcomes, why are autocorrelated mistakes such a common occurrence?

Umbrella_large“If you were studying the demand for umbrellas as an economist, you’d get rainfall data by cities, and you wouldn’t hesitate for two seconds to assume that everyone living in London knows how much it rains there. That would be assumption number one. And no one would argue with you either. [But] in macroeconomics, people argue about things like that. (In Klamer 1983, p. 43)”

What Lucas clearly has in mind is a model in which the distribution of outcomes (like the distribution of rainfall in London) is pregiven and independent of agent decisions (about whether or not to carry umbrellas) and agent errors. Future equilibrium states exist prior to and independent of the agent choice process that is supposed to generate them.

James Crotty

Conclusion: umbrellas are not economies. And I guess most people — at least outside The University of Chicago Department of Economics — knows that …

Reasons to dislike DSGE models

15 Aug, 2016 at 19:16 | Posted in Economics | 1 Comment

There are many reasons to dislike current DSGE models.


First: They are based on unappealing assumptions. Not just simplifying assumptions, as any model must, but assumptions profoundly at odds with what we know about consumers and firms …

Second: Their standard method of estimation, which is a mix of calibration and Bayesian estimation, is unconvincing …

Third: While the models can formally be used for norma- tive purposes, normative implications are not convincing …

Fourth: DSGE models are bad communication devices …

Olivier Blanchard

And still Blanchard and other mainstream economists seem to be impressed by the ‘rigour’ brought to macroeconomics by New-Classical-New-Keynesian DSGE models and its rational expectations and micrcofoundations — Blanchard even hopes that although current DSGE models are ‘flawed,’ in the future they can ‘fulfil an important need in macroeconomics, that of offering a core structure around which to build and organise discussions.’

It is difficult to see how.

3634flimTake the rational expectations assumption for example. Rational expectations in the mainstream economists’s world implies that relevant distributions have to be time independent. This amounts to assuming that an economy is like a closed system with known stochastic probability distributions for all different events. In reality it is straining one’s beliefs to try to represent economies as outcomes of stochastic processes. An existing economy is a single realization tout court, and hardly conceivable as one realization out of an ensemble of economy-worlds, since an economy can hardly be conceived as being completely replicated over time. It is — to say the least — very difficult to see any similarity between these modelling assumptions and the expectations of real persons. In the world of the rational expectations hypothesis we are never disappointed in any other way than as when we lose at the roulette wheels. But real life is not an urn or a roulette wheel. And that’s also the reason why allowing for cases where agents make ‘predictable errors’ in DSGE models doesn’t take us any closer to a relevant and realist depiction of actual economic decisions and behaviours. If we really want to have anything of interest to say on real economies, financial crisis and the decisions and choices real people make we have to replace the rational expectations hypothesis with more relevant and realistic assumptions concerning economic agents and their expectations than childish roulette and urn analogies.

‘Rigorous’ and ‘precise’ DSGE models cannot be considered anything else than unsubstantiated conjectures as long as they aren’t supported by evidence from outside the theory or model. To my knowledge no in any way decisive empirical evidence has been presented.


No matter how precise and rigorous the analysis, and no matter how hard one tries to cast the argument in modern mathematical form, they do not push economic science forwards one single millimeter if they do not stand the acid test of relevance to the target. No matter how clear, precise, rigorous or certain the inferences delivered inside these models are, they do not per se say anything about real world economies.

Proving things ‘rigorously’ in DSGE models is at most a starting-point for doing an interesting and relevant economic analysis. Forgetting to supply export warrants to the real world makes the analysis an empty exercise in formalism without real scientific value.

Blanchard thinks there is a gain from the DSGE style of modeling in its capacity to offer ‘a core structure around which to build and organise discussions.’ To me that sounds more like a religious theoretical-methodological dogma, where one paradigm rules in divine hegemony. That’s not progress. That’s the death of economics as a science.

Keynesian economics in a nutshell

15 Aug, 2016 at 16:27 | Posted in Economics | Comments Off on Keynesian economics in a nutshell


On the importance of pluralism

15 Aug, 2016 at 16:05 | Posted in Economics | Comments Off on On the importance of pluralism


A good illustration of what makes mainstream economics go astray — lack of pluralism (diversity) and like-minded people who are all wrong …

Truth and validity

15 Aug, 2016 at 14:01 | Posted in Theory of Science & Methodology | 1 Comment


Mainstream economics has become increasingly irrelevant to the understanding of the real world. The main reason for this irrelevance is the failure of economists to match their deductive-axiomatic methods with their subject.

It is — sad to say — a fact that within mainstream economics internal validity is everything and external validity and truth nothing. Why anyone should be interested in that kind of theories and models — as long as mainstream economists do not come up with any export licenses for their theories and models to the real world in which we live — is beyond comprehension. Stupid models are of no or little help in understanding the real world.

Noah Smith — ill-informed and misleading

14 Aug, 2016 at 11:51 | Posted in Economics | 3 Comments

Yours truly is far from being alone in criticising Noah Smith’s article on heterodox economics and mathematics (on which I commented yesterday). Tom Palley writes:

(1) Pretty much everything Smith charges heterodox economics with can be said about orthodox economics. That’s OK, but in that case we should open the classroom and op-ed pages to a variety of points of view and abandon the neoclassical monopoly.

IGLTA-misinform(2) Smith’s views on mathematical models come close to fetishism. Models have use value but they do not define economics (think of a paper with just math and no words vs. a paper with just words), and models are easily pushed into the realm of “negative” marginal returns.

Furthermore, Smith appears ignorant of the fact that mathematical modelling is very widespread in heterodox economics.

(3) Smith’s comments about predicting the crisis are facile. It’s not about predicting “dates”, but about having a sense of imminent developments and a sense of the deep-seated nature of the problems (i.e. demand shortage, income inequality, financial fragility, and tendency to stagnation). If orthodoxy had anticipated a fraction of what heterodoxy has, it would be trumpeting its achievements.

(4) In sum, this is an ill-informed article that aims to defend the economics status quo with unwarranted claims about the weaknesses of heterodox economics and strengths of orthodox economics.

Noah Smith — confusing mathematical masturbation with intercourse between research and reality

13 Aug, 2016 at 14:15 | Posted in Economics | 11 Comments

There’s no question that mainstream academic macroeconomics failed pretty spectacularly in 2008 …

Many among the heterodox would have us believe that their paradigm worked perfectly well in 2008 and after … This is dramatically overselling the product. First, heterodox models didn’t “predict” the crisis in the sense of an actual quantitative forecast.

64f5d94d9836c6a09b5d2009f0d4634a845bb2d7ba56bbaa16176c2fd0e958c0This is because much of heterodox theory is non-quantitative. Basically, people write down English words explaining their conceptual ideas about how the economy works. This describes the ideas of mid-20th-century economist Hyman Minsky, who wrote books and essays about the instability of the financial system. Minsky, though trained in math, chose not to use equations to model the economy — instead, he sketched broad ideas in plain English …

At the end of the day, policymakers and investors need to make quantitative decisions — how much to raise or lower interest rates, how big of a deficit to run, or how much wealth to allocate to Treasury bonds.

Noah Smith

Noah Smith — like so many other mainstream economists — obviously has the unfounded and ridiculous idea that because heterodox people like yours truly, Hyman Minsky, Steve Keen, or Tony Lawson, often criticize the application of mathematics in mainstream economics, we are critical of math per se.

I don’t know how many times I’ve been asked to answer this straw-man objection to heterodox economics– but here we go again.

No, there is nothing wrong with mathematics per se.

No, there is nothing wrong with applying mathematics to economics.

amathMathematics is one valuable tool among other valuable tools for understanding and explaining things in economics.

What is, however, totally wrong, are the utterly simplistic beliefs that

• “math is the only valid tool”

• “math is always and everywhere self-evidently applicable”

• “math is all that really counts”

• “if it’s not in math, it’s not really economics”

“almost everything can be adequately understood and analyzed with math”

So — please — let’s have no more of this feeble-minded pseudo debate where heterodox economics is described as simply anti-math!

russell_ackoffNo real problem worth solving can be solved without some basic research. Therefore the engagement of faculty and students on real problems yields basic research problems whose solutions are of practical significance. Furthermore, the validity of these solutions can be tested in the most effective way known: in application. This avoids one’s confusing mathematical masturbation with intercourse between research and reality.

Russell L. Ackoff


Serious academics are full of shit

11 Aug, 2016 at 18:53 | Posted in Education & School | 2 Comments

These fun-hating, highfalutin’ smarties have fought to maintain an exclusive and exclusionary scholastic environment since the first Ivory Towers were built …

I may be a blogger/reporter/writer/occasional internet loudmouth today, but I also identify as a scientist, and to some degree as a serious academic. What that doesn’t make me is smarter, or more important, or more deserving of respect, than you. What that doesn’t make me is free from the responsibility to participate in society, or to explain how I am using your taxpayer dollars. And it sure as hell doesn’t absolve me of the obligation to treat my fellow human beings as equals.

liz-lemon-eye-rollAnd if you’re wondering what any of this has to do with academics rolling their eyes at other academics who take selfies with gators, I’ll tell you: scientists who engage with the public are put down, forced on the defensive, and labeled a “waste of time” by their Smarter, More Serious, and Definitely More Anonymous academic peers, pretty much all the time.

Here’s the thing about scientists: we’re all just a bunch of nerds. Like many of my peers, I was inspired to walk the path of science thanks to an excessive dose of science fiction as a child …

Of course, I got older and discovered that real science is not about fighting alien monsters or building interdimensional laser beams. It is about The Slog …

But scientists aren’t drawn to their profession because they love mind-numbing repetition and enormous spreadsheets full of meaningless numbers. They are drawn to science because they are inspired by big ideas, or because they are obsessed with a burning question, or because they can’t stop dreaming of an awesome technology. In other words, because they are nerds who love science. So why are scientists giving other scientists shit for live-tweeting conferences, writing op-eds, doing public outreach, and finding creative ways to share their passion with the world and make that day-to-day slog more bearable?

The answer is complex. It involves enduring cultural norms, weird academic incentive structures, and institutionalized fears about the democratization of scholarship.

Maddie Stone

On tour again (personal)

7 Aug, 2016 at 16:50 | Posted in Varia | Comments Off on On tour again (personal)

Guest appearance in Hamburg again.’The Venice of the North’ is today as hip and hot as Berlin. Regular blogging will be resumed next weekend.

On the persistence of science-fiction economics

6 Aug, 2016 at 11:49 | Posted in Economics | 3 Comments

9781107763111iObscurantism is sustained by the self-interest of non-obscurantist scholars. To be effective, an attack on obscurantism has to be well documented and well argued. Mere diatribes are pointless and sometimes counterproductive. Yet scholars have a greater personal interest in achieving positive results than in exposing the flaws of others, not only because of the reward system of science, but also because achieving positive results is intrinsically more satisfying. On grounds of self-interest, therefore, many schoars will hesitate to take time off from their main work and hope that someone else will do the cleaning … The highly regarded economist Ariel Rubinstein has offered rare insider criticism of mainstream economics, commenting, for example, on a ‘as-if-rationality’ that “it ultimately became clear that the phrase ‘as if’ is a way to avoid taking responsibility for the strong assumptions upon which economic models are founded” …

When Joseph Stiglitz was asked at a private dinner party how economists can make repeated falsified claims without having their careers terminated, he reportedly answered: “I agree with you, but I don’t understand why you are so puzzled. What you should be assuming is that — as is done by most economists — economics is really a religion. So why should you be puzzled by the fact that they cling to and never give up their views despite frequent falsification?”

Confronted with the critique that they do not solve real problems, mainstream economists often react as Saint-Exupéry‘s Great Geographer, who, in response to the questions posed by The Little Prince, says that he is too occupied with his scientific work to be be able to say anything about reality. Confronting economic theory’s lack of relevance and ability to tackle real probems, one retreats into the wonderful world of economic models. One goes in to the shack of tools and stays there playing with the ‘toy-box’. While the economic problems in the world around us steadily increase, one is rather happily playing along with the latest toys in the mathematical toolbox.

Modern mainstream economics is sure very rigorous — but if it’s rigorously wrong, who cares?

Instead of making formal logical argumentation based on deductive-axiomatic models the message, we are better served by economists who more  than anything else try to contribute to solving real problems.

Representative agent models and the streetlight effect

6 Aug, 2016 at 09:39 | Posted in Economics | Comments Off on Representative agent models and the streetlight effect

Attempts to rationalize representative consumer models (especially for purposes other than social welfare measurement) may seem like a quixotic endeavor. Macroeconomists (and many applied microeconomists and econometricians) routinely assume the existence of one, seeing it as a necessary (though acceptable) evil required for the sake of tractability. Many mathematical economists are unwilling to accept the existence of any structure in macro demands. Some econometricians employ exact aggregation methods to specify macro demand equations, but reject any representative agent interpretation of the result as unnecessary if not erroneous.

Representative consumer models are typically employed when one wants to ignore the complications caused by aggregation. As a result, those economists that do consider aggregation explicitly will tend to actively disparage representative consumer models, in part because doing so justifies their emphasis on aggregation issues.


It is a fact that the use of a representative consumer assumption in most macro work is an illegitimate method of ignoring valid aggregation concerns. However, the representative consumer framework vastly simplifies a great deal of macro work and thought, and so is not likely to be abandoned.

Arthur Lewbel

Moralens självutnämnda väktare

6 Aug, 2016 at 08:33 | Posted in Politics & Society | 1 Comment

Sverige är en liberal demokrati. Utöver lagarna måste alla här respektera demokrati och mänskliga rättigheter som yttrandefrihet och åsiktsfrihet, jämlikhet och jämställdhet och allas rätt att välja sitt liv – partner, karriär, livsstil. Inget märkligt och ändå så stort att det svindlar.

Utanför denna kärna får var och en fritt välja sjal eller kippa, tillbe sin gud eller låta bli, äta fläsk och brännvin eller slippa, fira jul eller newroz …

KRTnVqgDCUGrPBSs73iZwMpR9DcMoralens självutnämnda väktare i förorten menar att deras normer är bättre än synen på kvinnor i det nya landet och därför går före. Andra menar att sharia står över värdsliga lagar. Här krävs tydlighet. Och mod. Alla som kommer till Sverige ska få veta vad som gäller.

Ingen får tumma på kvinnors rättigheter, oavsett religion, kultur och familjeförhållanden. Ingen får frånta unga rätten till sexualundervisning. Ingen får vända bort blicken när en tjej kommer tillbaka bortlovad efter semestern i det gamla hemlandet – eller inte återvänder alls. Ingen får böja sig för patriarkala kulturers krav på att få kuva kvinnor, kräva lydnad och kyskhet och beskriva släktens heder utifrån kvinnornas dygd.

Om en vecka ringer det in.

Det är i klassrummen den börjar, framtiden. Det är där vaccinet mot väktarrådens irrläror kan ges – men skolan behöver stöd från samhället omkring.

Heidi Avellan

In dreams (personal)

5 Aug, 2016 at 19:08 | Posted in Varia | 1 Comment


This one is in loving memory of Kristina, beloved wife and mother of David and Tora.
Twenty three years have passed since the day the unthinkable happened.
People say time heals all wounds.
I wish that was true.
But some wounds never heal — you just learn to live with the scars.

But in dreams,
I can hear your name.
And in dreams,
We will meet again.

When the seas and mountains fall
And we come to end of days,
In the dark I hear a call
Calling me there
I will go there
And back again.

‘Som ett rastlöst barn om våren’ (personal)

5 Aug, 2016 at 18:35 | Posted in Varia | Comments Off on ‘Som ett rastlöst barn om våren’ (personal)


En sång lika stor som livet självt. Oändligt vacker.

Economic modeling — nothing but obscurantist bullshit

5 Aug, 2016 at 16:31 | Posted in Economics | 1 Comment

65675509In the present article I consider the less frequently phenomenon of “hard obscurantism”, a species of the genus scholarly obscurantism. In academic debates, a more common term for obscurantism is “bullshit” … One may perhaps, distinguish between obscure writers and obscurantist writers. The former aim at truth, but do not respect the norms for arriving at truth, such as focusing on causality, acting as the Devil’s Advocate, and generating falsifiable hypotheses. The latter do not aim at truth, and often scorn the very idea that there is such a thing as the truth …

Although I believe that the cases I have selected for analysis are somewhat representative of mainstream economic theorizing, I cannot make strong claims about how typical they are. What I can assert with great confidence is that the authors I have singled out are far from marginal, and in fact are at the core of the profession. Their numerous awards testify to this fact.

These writings have in common a somewhat uncanny combination of mathematical sophistication on the one hand and conceptual naiveté and empirical sloppiness on the other. The mathematics, which could have been a tool, is little more than toy. The steam engine was invented by Hero of Alexandria in the first century A. D., but he considered it mainly as a toy, not as a tool that could be put to productive use. He did apparently use it, though, for opening temple doors, so his engine wasn’t completely idling. Hard obscurantist models, too, may have some value as tools, but mostly they are toys.

I have pointed to the following objectionable practices:

1. Citing empirical evidence in a cavalier way, in the form of anecdotes, “impressions”, and unsubstantiated historical claims …

2. Adopting huge simplifications that make the empirical relevance of the results essentially nil …

3. Assuming that the probabilities in a stochastic process are known to the agents … or even in some sense optimal …

5. Assuming that the unconscious has the capacity to carry out inter temporal tradeoffs …

7. Assuming that agents can choose optimal preferences …

11. Adhering to the instrumental Chicago-style philosophy of explanation, which emphasizes as-if rationality and denies that the realism of assumptions is a relevant issue.

Jon Elster  (Synthese 7/2016)

It’s hard not to agree with Elster’s critique of mainstream economics and its practice of letting models and procedures become ends in themselves, without considerations of their lack of explanatory value as regards real world phenomena. For more on modern mainstream economics and this kind of wilfully silly obscurantism, yours truly self-indulgently recommend reading this article on RBC or this article on mainstream axiomatics.

The power of simple models …

4 Aug, 2016 at 11:38 | Posted in Economics | 2 Comments

untitled2The need for coworker interaction explains the existence of a common workweek, but not why that workweek is 40 hours long instead of 30. This is the question that the economic model of labor supply really helps us to answer. The model says that the workweek is 40 hours long because, on the average, that’s how long workers want it to be. If most people found an extra hour of leisure much more valuable than an extra hour’s wage, profit-seeking employers would have an immediate incentive to reduce the length of the workweek. Here again we see the power of a simple theory to help explain what people do, even when they themselves correctly perceive that the proximate reasons for their actions are beyond their control.

Mirabile dictu!

The power of a simple theory?

Real people admittedly do not act according to the model, so how on earth are we supposed to consider the ‘explanation’ the model produces helpful for understanding real world labor market supply? Nonsense on stilts.

The representative agent — providing pseudo-microfoundations for macro models

3 Aug, 2016 at 19:00 | Posted in Economics | Comments Off on The representative agent — providing pseudo-microfoundations for macro models

fubar1Suppose that the aggregate choice of society does coincide with that of the representative individual, both before and after that change. This reflects a pious hope, but at least with this heroic assumption we should be able to use the model to make policy recommendations. Since the economy’s behavior is properly represented by one individual, it might seem that we merely have to ask, which of the two possible outcomes, that before the change or that after, does the representative agent prefer?

However, this reasoning contains a fatal flaw. It is possible that the
representative individual prefers situation a to situation b, whilst all the
individuals that are “represented” strictly prefer b to a. Even though
the representative individual makes the same choices as the aggregate choices
of the individuals in the economy, the preferences of that agent may be
completely at variance with theirs! …

Thus to infer society’s preferences from those of the representative individual,
and to use these to make policy choices, is illegitimate …

It should be clear by now that the assumption of a representative individual
is far from innocent; it is the fiction by which macroeconomists can justify
equilibrium analysis and provide pseudo-microfoundations. I refer to these as
pseudo-foundations, since the very restrictions placed on the behavior of the
aggregate system are those which are obtained in the individual case and, as we
have seen, there is no formal justification for this. Thus, when the conclusions
of such a model are tested with empirical data (not a particularly frequent
occurrence) and should they, by chance, be rejected, this may simply reflect the
fact that the assumption that the economy could be represented by a single
individual was erroneous.

Alan Kirman

Yours truly is extremely fond of economists like Alan Kirman. With razor-sharp intellects they immediately go for the essentials. They have no time for bullshit. And neither should we.

New Classical, Real Business Cycles, Dynamic Stochastic General Equilibrium (DSGE) and ‘New Keynesian’ macroeconomics with their microfounded macromodels are bad substitutes for real macroeconomic analysis. Opting for cloned representative agents that are all essentially identical is of course not a real solution to the fallacy of composition that the Sonnenschein-Mantel-Debreu theorem points to. Representative agent models are rather an evasion whereby issues of distribution, coordination, heterogeneity — everything that really defines macroeconomics — are swept under the rug.

Miscarriages of justice

3 Aug, 2016 at 08:54 | Posted in Politics & Society | 1 Comment




AD/AS models and the ‘disappearance’ of involuntary unemployment

2 Aug, 2016 at 17:43 | Posted in Economics | 3 Comments

eco-202-ch-36-unemployment-and-inflation-15-638We have indeed come round in a circle. The whole vision of the working of the macrosystem presented, in terms of the AD/AS model, by far too many contemporary textbooks, is essentially pre-Keynesian. Monetary spending may fluctuate, but whether or not such fluctuations affect employment and output is said to depend on reactions affecting real wages. Slow adjustment of money wages to price changes is held to account for cyclical variations in employment and output. With respect to the longer term, it is presumed that real wages return to their proper full-employment level …

As regards the fundamental elements of the Keynes conception … all have disappeared.

How have we got into this situation? In the 1970s, reflecting a general change in the political and intellectual climate, economic theorists and commentators of a right-wing, free-market persuasion began to advance, with renewed vigour, old ideas which had for the last few decades been put to the side. Under novel labels such as ‘New Classical’ and ‘New Keynesian’ theory, explanations of unemployment being simply of a voluntary or merely frictional character were reasserted, attracted sympathetic listeners and soon found their way into the burgeoning crop of macro textbooks coming on the market. Over the years distinctive features of the Keynes theory – such as the concepts of involuntary unemployment, of the marginal efficiency of capital as distinct from the marginal productivity of capital, of uncertainty as something different from mathematically measurable risk, and the understanding that the macro economy contained within itself, even in the long run, no reliable self-righting mechanism to guarantee the automatic establishment of full employment – tended to slip out of the mainstream picture. Indeed, more than that: the Keynes theory is frequently misrepresented – it is typically asserted that an assumption of wage-stickiness is the critical factor differentiating the Keynes theory from the classical theory. Scholars who should have known better have been all too ready to adopt the old classical labour market theory of unemployment as embodied in the AS curve, apparently seeing the AD/AS model as a convenient and acceptable device for allowing analysis to be extended beyond the fix-price world of IS/LM. The upshot is that mainstream teaching of macroeconomic theory is today typically propounding a view of the working of the economy which is a very long way from the vision presented in the General Theory or from the conventional wisdom of the immediate post-war years, but strikingly similar to views current long ago, before the ‘Keynesian Revolution’. It is not going too far to say that the practical common-sense of the Keynesian perspective has (at least in some not un-influential quarters) been replaced by irrelevance and fantasy.

Roy H. Grieve


As Grieve notices, there are unfortunately a lot of mainstream economists out there who still think that price and wage rigidities are the prime movers behind unemployment. What is even worse — I’m totally gobsmacked every time I come across this utterly ridiculous misapprehension — is that some of them even think that these rigidities are the reason John Maynard Keynes gave for the high unemployment of the Great Depression. This is of course pure nonsense. For although Keynes in General Theory devoted substantial attention to the subject of wage and price rigidities, he certainly did not hold this view.

Since unions/workers, contrary to classical assumptions, make wage-bargains in nominal terms, they will – according to Keynes – accept lower real wages caused by higher prices, but resist lower real wages caused by lower nominal wages. However, Keynes held it incorrect to attribute “cyclical” unemployment to this diversified agent behaviour. During the depression money wages fell significantly and – as Keynes noted – unemployment still grew. Thus, even when nominal wages are lowered, they do not generally lower unemployment.

In any specific labour market, lower wages could, of course, raise the demand for labour. But a general reduction in money wages would leave real wages more or less unchanged. The reasoning of the “classical” economists was, according to Keynes, a flagrant example of the “fallacy of composition.” Assuming that since unions/workers in a specific labour market could negotiate real wage reductions via lowering nominal wages, unions/workers in general could do the same, the classics confused micro with macro.

Lowering nominal wages could not – according to Keynes – clear the labour market. Lowering wages – and possibly prices – could, perhaps, lower interest rates and increase investment. But to Keynes it would be much easier to achieve that effect by increasing the money supply. In any case, wage reductions was not seen by Keynes as a general substitute for an expansionary monetary or fiscal policy.

Even if potentially positive impacts of lowering wages exist, there are also more heavily weighing negative impacts – management-union relations deteriorating, expectations of on-going lowering of wages causing delay of investments, debt deflation et cetera.

So, what Keynes actually did argue in General Theory, was that the “classical” proposition that lowering wages would lower unemployment and ultimately take economies out of depressions, was ill-founded and basically wrong.

To Keynes, flexible wages would only make things worse by leading to erratic price-fluctuations. The basic explanation for unemployment is insufficient aggregate demand, and that is mostly determined outside the labor market.

It is not very plausible to assert that unemployment in the United States in 1932 was due either to labour obstinately refusing to accept a reduction of money-wages or to its obstinately demanding a real wage beyond what the productivity of the economic machine was capable of furnishing. Wide variations are experienced in the volume of employment without any apparent change either in the minimum real demands of labour or in its productivity. Labour is not more truculent in the depression than in the boom — far from it. Nor is its physical productivity less. These facts from experience are a prima facie ground for questioning the adequacy of the classical analysis …

The classical school [maintains that] while the demand for labour at the existing money-wage may be satisfied before everyone willing to work at this wage is employed, this situation is due to an open or tacit agreement amongst workers not to work for less, and that if labour as a whole would agree to a reduction of money-wages more employment would be forthcoming. If this is the case, such unemployment, though apparently involuntary, is not strictly so, and ought to be included under the above category of ‘voluntary’ unemployment due to the effects of collective bargaining, etc …

The classical theory … is best regarded as a theory of distribution in conditions of full employment. So long as the classical postulates hold good, unemploy-ment, which is in the above sense involuntary, cannot occur. Apparent unemployment must, therefore, be the result either of temporary loss of work of the ‘between jobs’ type or of intermittent demand for highly specialised resources or of the effect of a trade union ‘closed shop’ on the employment of free labour. Thus writers in the classical tradition, overlooking the special assumption underlying their theory, have been driven inevitably to the conclusion, perfectly logical on their assumption, that apparent unemployment (apart from the admitted exceptions) must be due at bottom to a refusal by the unemployed factors to accept a reward which corresponds to their marginal productivity …

J M Keynes General Theory


Känn ingen sorg för mig Göteborg

2 Aug, 2016 at 15:41 | Posted in Varia | Comments Off on Känn ingen sorg för mig Göteborg


Freddie Wadling 1951-2016


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