Chicago economists — people who have their heads fuddled with nonsense

27 Oct, 2017 at 13:06 | Posted in Economics | 2 Comments

joblossMainstream macroeconomics has always had problems with the notion of involuntary unemployment. According to New Classical übereconomist Robert Lucas, an unemployed worker can always instantaneously find some job. No matter how miserable the work options are, “one can always choose to accept them,” according to Lucas:

KLAMER: My taxi driver here is driving a taxi, even though he is an accountant, because he can’t find a job …

LUCAS: I would describe him as a taxi driver [laughing], if what he is doing is driving a taxi.

KLAMER: But a frustrated taxi driver.

LUCAS: Well, we draw these things out of urns, and sometimes we get good draws, sometimes we get bad draws.

Arjo Klamer

In New Classical Economics unemployment is seen as a kind of leisure that workers optimally select. In the basic DSGE models used by these economists, the labour market is always cleared – responding to a changing interest rate, expected lifetime incomes, or real wages, the representative agent maximizes the utility function by varying her labour supply, money holding and consumption over time. Most importantly – if the real wage somehow deviates from its “equilibrium value,” the representative agent adjust her labour supply, so that when the real wage is higher than its “equilibrium value,” labour supply is increased, and when the real wage is below its “equilibrium value,” labour supply is decreased.

In this model world, unemployment is always an optimal choice to changes in the labour market conditions. Hence, unemployment is totally voluntary. To be unemployed is something one optimally chooses to be.

Yours truly has to admit of being totally unimpressed by this kind of New Classical macroeconomic quackery. I guess Keynes would have felt the same:

The Conservative belief that there is some law of nature which prevents men from being employed, that it is “rash” to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years … 0616_ig-john-maynard-keynes_1024x576Our main task, therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and what seems nonsense is nonsense. We shall try to show him that the conclusion, that if new forms of employment are offered more men will be employed, is as obvious as it sounds and contains no hidden snags; that to set unemployed men to work on useful tasks does what it appears to do, namely, increases the national wealth; and that the notion, that we shall, for intricate reasons, ruin ourselves financially if we use this means to increase our well-being, is what it looks like – a bogy.

John Maynard Keynes (1929)


  1. At the root of this conservative thinking is it also an assumption that people are here to serve the economy rather than the economy serving people? Money trumps life. Profits trump people. Corporations trump community. The tail wags the dog.

  2. The NCE point is valid strictly speaking, in that almost any unemployed person can find work if they demand a sufficiently low wage.

    But clearly it’s not acceptable to require anyone to work for say one tenth the minimum wage. So the NCE point is just an abstract and apparently useless theoretical point. However, strikes me the point is actually of some interest. It suggests it would be possible to subsidise those “one tenth the min wage” into work, because as the NCE point implies, there are a very large number of very low output jobs actually out there.

    The work would in most cases be very unproductive, but never mind: at least it would provide work experience. “Learning by doing” is a very good way of learning. Plus it would add a finite amount to GDP, assuming the output of those jobs exceeded the administration cost of the scheme: maybe a bit optimistic.

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