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Keynes on Individual Behaviour and the Possibility of Involuntary Unemployment Equilibrium

Keynes on Individual Behaviour and the Possibility of Involuntary Unemployment Equilibrium. Roy J. Rotheim Skidmore College. Keynes Seminar Robinson College 15 March 2011.

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Keynes on Individual Behaviour and the Possibility of Involuntary Unemployment Equilibrium

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  1. Keynes on Individual Behaviour and the Possibility of Involuntary Unemployment Equilibrium Roy J. Rotheim Skidmore College Keynes Seminar Robinson College 15 March 2011

  2. “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).

  3. “Choice … presupposes that the world is open and actual events need not have been” (Lawson, 1997, p. 30).

  4. Conventional Wisdom on Unemployment

  5. Direction of Employment • Quantity of Employment

  6. Structural (Mismatch) Unemployment

  7. 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).

  8. Revival of the Beveridge Curve (job vacancies relative to the number of unemployed workers)

  9. “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.”

  10. Keynesian (sic) Unemployment: Sticky Wages in the Labour Market [Expressed in terms of a Hicksian ISLM or AD/AS Framework]

  11. “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).

  12. 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.

  13. Policy

  14. 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)

  15. 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.

  16. It’s all about individual choice,disequilibrium and distribution and within a or the labour market.

  17. 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

  18. Each individual producer chooses to hire labour at a real-wage equal to the value of that worker’s marginal product.

  19. 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

  20. Disequilibrium and Distribution Real Wages must fall to make labour cheaper so that firms will be more prone to demanding their labour services

  21. Recessions are periods when households dislike working…. when households reduce their labor supply to drive up wages” (Robert Shimer, 2009, p. 281).

  22. 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

  23. How, then, could they speak about a redistribution of income away from labour and toward capital as a panacea for changes in the levelof employment when the logic of their analysis presumed that the level of employment for the economy as a whole could not change?

  24. 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

  25. 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.

  26. JMK to DHR (1933) in re ACP T of U: “What’s in the denominator of ACP’s real-wage?”

  27. 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)?

  28. 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

  29. 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

  30. 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

  31. 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).

  32. There is no meaning to the idea of disequilibrium, especially in a market that does not exist logically

  33. “… [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).

  34. Transcend the conceptualisation of an individual not being willing to work at a wage that would equal the value of her marginal product

  35. Transcend the idea of free choice when there were no free choices to be had – the consequences of the presumption of closure

  36. Transcend the conceptualisation of a labour market – both a and the labour market

  37. Involuntary Unemployment Equilibrium

  38. “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).

  39. “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, boldRJR).

  40. “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).

  41. Deconstruct those ideas

  42. I do not choose to hire labor even if what I make currently by employing a worker is equal to what I pay them.

  43. How do I know whether employing another worker will bring in enough revenue to cover her wage, if I were to repeat the experiment?

  44. The assumptions of atomism and closure imply that the firm will always be assured that the marginal value product of labour equals its wage

  45. 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

  46. 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

  47. “Now if the term social is to designate anything specific here, it must be a dependency on human intentional agency” (Lawson, 1997, p. 31)

  48. 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.

  49. 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.

  50. 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

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