Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Economic democracy wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Edmund Phelps wikipedia , lookup
Business cycle wikipedia , lookup
Transformation in economics wikipedia , lookup
Full employment wikipedia , lookup
Refusal of work wikipedia , lookup
Keynes on Individual Behaviour and the Possibility of Involuntary Unemployment Equilibrium Roy J. Rotheim Skidmore College Keynes Seminar Robinson College 15 March 2011 “This book … has evolved into what is primarily a study of the forces which determine changes in the scale of output and employment as a whole…. A monetary economy, we shall find, is essentially one in which changing views about the future are capable of influencing the quantity of employment and not merely its direction” (JMK, 1936, p. vii, italics RJR). “Choice … presupposes that the world is open and actual events need not have been” (Lawson, 1997, p. 30). Conventional Wisdom on Unemployment • Direction of Employment • Quantity of Employment Structural (Mismatch) Unemployment This mess was caused by over-investment in housing, and bringing down unemployment will be a gradual process. You can’t change the carpenter into a nurse easily, and you can’t change the mortgage broker into a computer expert in a manufacturing plant very easily. Eventually that stuff will sort itself out. People will be retrained and they’ll find jobs in other industries (Charles Plosser, President Federal Reserve Bank of Philadelphia, interview in the Wall Street Journal, Feb 14, 2011). Revival of the Beveridge Curve (job vacancies relative to the number of unemployed workers) “My dear Beveridge, I am grateful to you for sending me your criticism of my book….[T]he general nature of your points is such as to convince me that I have really had a total failure in my attempt to convey to you what I am driving at.” Keynesian (sic) Unemployment: Sticky Wages in the Labour Market [Expressed in terms of a Hicksian ISLM or AD/AS Framework] “Keynesians do not think that the typical level of unemployment is ideal—partly because unemployment is subject to the caprice of aggregate demand, and partly because they believe that prices adjust only gradually. In fact, Keynesians typically see unemployment as both too high on average and too variable, although they know that rigorous theoretical justification for these positions is hard to come by” (Alan Blinder, 1993). Theoretical justification for both of these interpretations is some variant of a DSGE model (LR):the future is conflated to the present by assuming that probability distributions of future earnings are known and where there are contingency contracts in all markets; (SR): frictions in those markets may cause temporary disequilibria. Policy Structural (“direction of employment”) • Better information, subsidized retraining and relocation, etc., for the individual to make free labour supply decisions. • No monetary or fiscal policies (these are individual issues) Keynesian (“level of employment”) • Monetary and Fiscal Policies (but only because markets get clogged) • these are still issues understood at the individual level; at least the language of the labour market is the same as the language of the individual in a labour market. It’s all about individual choice, disequilibrium and distribution and within a or the labour market. Each individual worker chooses to offer her labour services at a real-wage equal to the rate at which she is willing to substitute work for leisure and be no worse off Each individual producer chooses to hire labour at a real-wage equal to the value of that worker’s marginal product. Full Employment: all potential workers will be employed (in either scenario) so long as the wage at which they are willing to offer labour services is equal to the value of their marginal product Disequilibrium and Distribution Real Wages must fall to make labour cheaper so that firms will be more prone to demanding their labour services Recessions are periods when households dislike working…. when households reduce their labor supply to drive up wages” (Robert Shimer, 2009, p. 281). Keynes found all of those explanations for unemployment illogical, especially the second, where he said (Ch. 19) that they had no method of analysis by which to conceptualise the problem How, then, could they speak about a redistribution of income away from labour and toward capital as a panacea for changes in the level of employment when the logic of their analysis presumed that the level of employment for the economy as a whole could not change? One could only posit the demand curve for an individual firm if it were assumed that it knew with certainty that everything it produced would be sold at a known price Then one could say that labour would be hired so long as the value of its marginal product (the extra output sold by employing the worker at a known price of that product equals) equals its wage. JMK to DHR (1933) in re ACP T of U: “What’s in the denominator of ACP’s realwage?” How does one go from the individual firm (where its own, known, product price is in the denominator of the real-wage) to industry as a whole (where presumably some index of wage-good prices is in the denominator)? It must be assumed that changes in money-wages do not affect the price index of wage goods (which can only occur if output and employment for the economy as a whole cannot change – presumes full employment): Closure Hidden Implication No individual firm’s actions (proposing to changes wages, output, prices) can affect the material conditions experienced by any other firm or the outcomes of those firm’s decisions: Atomism The presumption of Closure and Atomism implies that there are no real choices available to firms. Presuming full employment at the outset implies that each firm is locked in to its optimal input mix and each worker who wishes to work will have a job If full employment of resources is presumed, i.e., that the level of employment is given and cannot change, then how does one speak of changes in the level of employment? “They have no method of analysis by which to address the problem” (Keynes, ch. 19). There is no meaning to the idea of disequilibrium, especially in a market that does not exist logically “… [T]he mathematization of economics … formalized the system as a series of markets each described by a demand function and a supply function. If the equations are static, they admit of only one solution, if the equations are well behaved. There is no other set of value for which the specified system is internally consistent. Therefore the solution set is the equilibrium, and that equilibrium ensures co-ordination of plans which represent optimal choices, but there can be no meaning to disequilibrium in such a system. The conflict between this concept and Keynes’s conception is a major source of the difficulty in understanding Keynes today. It is the source of statements that unemployment equilibrium is an impossibility or an illogicality and that, rather, the General Theory should be interpreted as a theory of unemployment disequilibrium, possibly adding the idea that adjustment to equilibrium is quite slow…” (Chick, 1998, 40-41). Transcend the conceptualisation of an individual not being willing to work at a wage that would equal the value of her marginal product Transcend the idea of free choice when there were no free choices to be had – the consequences of the presumption of closure Transcend the conceptualisation of a labour market – both a and the labour market Involuntary Unemployment Equilibrium “Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that [money] wage would be greater than the existing volume of employment” (1936, p.15). “For the mere existence of an insufficiency of effective demand may, and often will, bring the increase of employment to a standstill before a level of full employment has been reached. The insufficiency of effective demand will inhibit the process of production in spite of the fact that the marginal product of labour still exceeds in value the marginal disutility of employment” (1936, p. 31, bold RJR). “In a monetary production economy … labour cannot insist on being employed, even if its marginal revenue product and real wage exceed the marginal disutility of that amount of employment” (Hayes 2006, p. 47; paraphrasing 1936, p. 291). Deconstruct those ideas I do not choose to hire labor even if what I make currently by employing a worker is equal to what I pay them. How do I know whether employing another worker will bring in enough revenue to cover her wage, if I were to repeat the experiment? The assumptions of atomism and closure imply that the firm will always be assured that the marginal value product of labour equals its wage One, then, can only make sense of Keynes’s intuition about the possibility of involuntary unemployment if the assumptions of closure and atomism are abandoned Individuals, instead, must be socially constructed and recognise that they are socially constructed – their nature and understanding of their nature exists as a consequence of their actions in the context of others’ actions “Now if the term social is to designate anything specific here, it must be a dependency on human intentional agency” (Lawson, 1997, p. 31) I cannot know with any degree of certainty whether employing another worker will bring in enough revenue to cover her wage, if I were to repeat the experiment. If events (the receipt of revenues today from hiring so many workers) are the outcomes of systems that are open (in the sense that each individual’s actions affect and are affected materially by others’ actions – “intrinsic closure” is violated), then it is impossible for any firm to be assured that the outcome they just experienced will repeat itself if they engage labour in exactly the same way as they just did. Current income, transcending atomism and closure, is not a reliable indicator of what the future will bring if I were to repeat my production plans -- a concurrence of events does not (cannot) assure a constant conjunction of events “Choice … presupposes that the world is open and actual events need not have been” (Lawson, 1997, p. 30). Keynes makes intentional, purposeful choice, by a socially constructed individual, to stand at the focal point of his analysis. Just because something occurred, does not mean that it will recur, even if I do everything exactly the same expectation of what might occur if I were to do everything the same, but in an open system’s framework where I had better be thinking about what others might be doing as well and how their actions might affect my outcomes. “This book … has evolved into what is primarily a study of the forces which determine changes in the scale of output and employment as a whole…. A monetary economy, we shall find, is essentially one in which changing views about the future are capable of influencing the quantity of employment and not merely its direction” (JMK, 1936, p. vii, bold and italics RJR). [O]ur method of analysing the economic behaviour of the present under the influence of changing ideas about the future…” (Keynes, 1936) Keynes called the method for analysing the economic behaviour of the present under the influence of changing ideas about the future his Theory of Effective Demand “I am not interested in constructing a building, so much as in having a perspicuous view of the foundations of possible buildings. So I am not aiming at the same target as the scientists and my way of thinking is different from theirs” (Ludwig Wittgenstein, Culture & Values p.7, quoted in Monk 300- 301) The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organised and orderly method of thinking out particular problems…” (Keynes, 1936, p. 297). The point of Effective Demand, according to Keynes, occurred where the aggregate supply price of a given level of employment equaled the aggregate demand price of that level of employment The language of this theory is predicated on our socially contextual individual who must think in terms of the expectation of receipts by engaging any level of employment “The aggregate supply price of the output of a given amount of employment is the expectation of proceeds which will just make it worth the while of the entrepreneurs to give that employment” (1936, p. 24) He defines Aggregate Demand “to be the proceeds which entrepreneurs expect to receive from the employment of N men…” (1936, p. 25). How much revenue a firm expects to receive will be a function of many factors, some which are in its control, some which are beyond its control because it recognises that it is not the safe atom operating within the closed framework presupposed by the mainstream How much employment each producer engages is based on the expectation of revenue in this open environment, which takes on different forms depending upon the time-frame in which it is engaging that labour. In the immediate or short-period (see Hayes for some interesting insights in the notion of periods in Keynes) Keynes reckons that it might “be sensible for producers to base their [short-term] expectations on the assumption that the most recently realised results will continue, except in so far as there are definite reasons for expecting a change” (p. 51). “Nevertheless, we must not forget that, in the case of durable goods, the producer’s shortterm expectations are based on the current long-term expectations of the investor; and it is of the nature of long-term expectations that they cannot be checked at short intervals in the light of realized results…. Thus the factor of current long-term expectations cannot be even approximately eliminated or replaced by realised results” (1936, p. 51). “[I]n the case of additions to capital equipment and even of sales to distributors, these short-term expectations will largely depend on the long-term (or mediumterm) expectations of other parties. It is upon these various expectations that the amount of employment which the firms offer will depend (1936, p. 47, italics RJR) Marginal Efficiency of Capital “…I define the marginal efficiency of capital as being equal to that rate of discount which would make the present value of the series of annuities given by the returns expected from the capital-asset during its life just equal to its supply price” (1936, p. 135, italics RJR). Keynes reckoned that the MEC would (or should it have been ‘could’?) fall as more producers increased their investment activities because: • The cost of producing more capital goods would rise; • The price of the extra output would fall as more was brought onto the market. The individual firm would have no way of knowing with certainty what would happen to the replacement cost of her capital as she purchased more of it or whether she could sell all the extra output produced by the extra capital and at what price it might sell. It is for this reason that Keynes thought of the MEC in terms of the prospective yield on a capital asset; it is within an open system that Keynes is identifying the basis upon which individuals can know. Traditional theory (including modern DSGE models) assumes complete markets (closure) and atomism, so that their investing firm need worry only about their production function and whatever is the marginal product of capital – something internal to the firm; not dependent on what other firms might do. “The ordinary theory of distribution, where it is assumed that capital is getting now its marginal productivity (in some sense or other), is only valid in a stationary state. The aggregate current return to capital has no direct relationship to its marginal efficiency” (1936, p. 139). “The most important confusion concerning the meaning and significance of the marginal efficiency of capital has ensued on the failure to see that it depends on the prospective yield of capital, and not merely on its current yield” (1936, p. 141). “[I]n the case of additions to capital equipment and even of sales to distributors, these short-term expectations will largely depend on the long-term (or mediumterm) expectations of other parties. It is upon these various expectations that the amount of employment which the firms offer will depend (1936, p. 47, italics RJR) Involuntary Unemployment Equilibrium “For the mere existence of an insufficiency of effective demand may, and often will, bring the increase of employment to a standstill before a level of full employment has been reached. The insufficiency of effective demand will inhibit the process of production in spite of the fact that the marginal product of labour still exceeds in value the marginal disutility of employment” (1936, p. 31, italics RJR). The Keynesian Revolution: Opened and Closed in an Instant J.R. Hicks “Mr Keynes and the Classics: A Suggested Interpretation” Econometrica, April 1937 “My dear Hicks, At long last I have caught up with my reading and have been through the enclosed. I found it very interesting and really have next to nothing to say by way of criticism. …At one time I tried the equations, as you have done, with I in all of them. The objection to this is that it overemphasizes current income. In the case of the inducement to invest, expected income for the period of the investment is the relevant variable. This I have attempted to take account of in the definition of the marginal efficiency of capital. As soon as the prospective yields have been determined, account has been implicitly taken of income, actual and expected. But, whilst it may be true that entrepreneurs are over-influenced by present income, far too much stress is laid on this psychological influence, if present income is brought into such prominence. It is, of course, all a matter of degree. My own feeling is that present income has a predominant effect in determining liquidity preference and saving which it does not possess in its influence over the inducement to invest” (JMK to JRH, 31 March 1937, in CW XIV, pp. 79-80). “Your other points I agree with mostly; except that I remain impenitent about including income in the marginal efficiency of capital equation. Of course I agree that it is expected income that logically matters; but the influence of current events on expectations (admittedly a loose and unreliable connection) seems to me potentially so important, that I feel much happier if it is put in and marked unreliable, than it if is merely talked about, and not impressed on the reader’s mind by being put into the formula, which he will take down in his notes” (JRH to JMK, 9 April 1937, in CW XIV, pp. 81-82). Roy Harrod “Mr Keynes and Traditional Theory,” Econometrica, January 1937 “My dear Roy, I like your paper…more than I can say. I have found it instructive and illuminating, and I really have no criticisms. I think that you have re-oriented the argument beautifully. I also agree with your hints at the end about future dynamic theory. I am reading a paper to the economic club at Stockholm on about the same date as you will be reading this, and have been thinking (it isn’t written yet) of trying to pick out what I thought most important. But I now feel that I should like to read them your paper instead!” (JMK to RFH, 30 August, 1936, in CW XIV, pp. 83-84). “There are, however, one or two points mainly omitted in yours which I should be inclined to put into mine: -… 2. You don’t mention effective demand or, more precisely, the demand schedule for output as a whole, except in so far as it is implicit in the multiplier…” Concluding Remarks On the Impossibility of Involuntary Unemployment Equilibrium in Mainstream Economic Theory or Policy