Tuesday, April 8, 2008

THE KEYNESIAN CURE

by the Sandwichman

J. Bradford DeLong calls for "more aggregate demand". Some of the responses:

"More debt! Let's party!" "Maybe we should stop looking for ways to keep moving at locomotive speeds. Take a walk for a while." "So, the levees have failed and flooding has ensued. Your plan is to pump like mad then rebuild in the same place." "But what is really appalling and scary is that the best answer you and others can come up with is 'go out and spend' until we find the next locomotive." "The commodities price run up is far more than the effect of speculation, but rather an indication that the world economy is straining against fundamental physical limits." "New times ahead, not more of the same with variations."

Can you say "paradigm shift"? But wait. There is a Keynesian cure available. The ultimate solution put forward by Keynes and identified by him explicitly as one of three essential "ingredients of a cure." Why do our self-styled Keynesians insist on restricting their policy too kit to only two of those three ingredients and eschewing the third and ultimate ingredient?

In a letter to the poet, T.S. Eliot, dated April 5, 1945, John Maynard Keynes identified shorter hours of work as one of three "ingredients of a cure" for unemployment. The other two ingredients were investment and more consumption. Keynes regarded investment as "first aid," while he called working less the "ultimate solution." A more thorough and formal presentation of his view appeared in a note Keynes prepared in May 1943 on "The Long-Term Problem of Full Employment. In that note, Keynes projected three phases of post-war economic performance. During the third phase, estimated to commence some ten to fifteen years after the end of the war, "It becomes necessary to encourage wise consumption and discourage saving, –and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours."

10 comments:

Cameron Mulder said...

I thought France has experimented with this solution and found it not to work.

It is a great idea, but i have not read any empirical evidence to back it up.

Kaleberg said...

Right now, the US has a 35 hour work week, if the BLS is to be believed. (College educated professionals work much longer hours, but they are generally not paid by the hour).

For most individuals, the problem is getting enough work hours. I don't see how cutting their hours, and therefore their salaries and benefits is going to help THEM. In fact, I don't see how it is going to help anyone. It is not as if the company is going to give more hours to someone else or hire a new worker. They'll simply drive everyone a bit harder or let certain things slide. As money is pumped out of the economy, they can afford to.

Sandwichman said...

Cameron,

It worked. The policy itself wasn't ideal. There were winners and losers and a great deal of antagonism toward the idea from small employers and right-wing politicians. Nevertheless, the impression of abject "failure" created in the Anglo-American press was a "more doctors smoke camels" propaganda operation.

There were empirical studies done of the 35-hour policy that showed moderate job creation. According to Bosch, most empirical studies of working time reductions "have positive employment effects of between 25 and 70 percent of the arithmetically possible effect. Only a few studies find zero or even negative effects."

You're not going to come across a lot of this empirical evidence for the simple reason that Anglo-American media and the economics profession won't go out of their way to make the information available. Some are positively hostile but most, I'm afraid, are simply more interested in maximizing economic "growth" and aren't too interested in slower but qualitatively better alternatives.

kaleberg,

It depends on how the statistics are aggregated. If you average out full-time and part-time workers the "average" is going to be much lower than is the standard workweek for full-time employees. Looking at full-time employees only the average is greater than 40 hours a week. I think it was around 43 the last time I looked, which was two or three years ago. These things don't change all that fast.

Your estimate of what the problem for "most individuals" is a very subjective one. If they're working full time and don't have enough money then the problem is not "getting enough work hours" but either wages that are too low or distorted consumer spending habits. Those whose problem actually is "getting enough work hours" are unemployed (including those who work part-time involuntarily).

Unfortunately, I'm afraid that your not being able to see how cutting hours would help the unemployed or increase wages is a learned incapacity. Without even knowing you're doing it, you've incorporated certain assumptions into your implicit "model" of employment, wages and working time that have no business being there. One of those assumptions may be that employers and employees make optimal choices regarding hours of work and output. That is the standard assumption of economists and it is contrary to economic theory.

Let me repeat, slowly, economists routinely make an assumption that is contrary to what economic theory tells us is the case. So it would be understandable if you made the same assumption. But you would be wrong.

As for "the company" simply driving everyone a bit harder... are you a human being or are you a jelly fish? Have you ever heard of people standing up for their rights and WINNING? Or is that to unAmerican for you?

reason said...

Sandwichman,
I don't know why your response to Kaleberg had to be so long. Supply falls => price goes up is sufficient.

Looking (certus paribus) at the individual rather than the whole market is the error in his thinking. A labour market equivalent of the paradox of thrift.

Of course to explain the whole theory you would have to explain about competition in the labour market and the limited bargaining power of individuals (not to mention asymmetrical information). But we don't need to know all the details, the simple explaination is enough.

Sandwichman said...

Thanks, reason. Yeah, you're right, supply falls => price goes up should be sufficient. At least as a first, crude approximation. But there's also some bothersome complications in "labor markets". For example, price goes down => supply rises.

In the logic of supply and demand that shouldn't happen because in that logic there is some reservation price below which a potential seller won't sell. Unlike other commodities, though, unsold labor time has no shelf life unless the individual also has the resources to go back to school, subsistence farm, start up their own business, etc.

One might point out that the purpose of unions is to establish such a (minimum) reservation wage. And the way you do that, unionists understood in the nineteenth century and right up to about the 1960s (and still understand outside of the English-speaking countries), is you collectively limit the length of the working day/week/year.

So it is not simply a supply and demand question but also a collective action one. Now your new-fangled neo-laissez-fairy economists don't like unions because they introduce 'rigidities' in labor markets. HA! Those so-called rigidities are what makes it possible for a labor market to behave like a market. Otherwise workers just become a passive "resource" for employers to mine, harvest or otherwise exploit or abandon.

John Vertegaal said...

Unless Keynes's musings are deducible from logical underpinnings, to show the how and why investment is "first aid" only, his cure for unemployment sounds self-contradictory to me. For how can investment and its antonym consumption be both proclaimed as cure? As long as without a return all capital is deemed valueless, no investment gets determined on the supply side. Thus, laying the determination of growth on the doorstep of investment will never get us past Keynes's confusion about when determination takes place. Furthermore, empirical evidence to this effect is meaningless in a society wherein financial and not productive power sets the rules for determining value on an ongoing basis; that is until an inevitable crash occurs, as a false ontology cannot be imposed.
A post-Keynesian explanation could be that as long as economy-wide financing costs, becoming part and parcel of to be resolved retail output, are not utilized for that purpose by its recipients' income, but instead becomes directed to renewed capital investment and an increasingly more difficult to resolve debt level; the "good life", or an ever rising standard of living for all, is bound to stagnate therewith as well. Entrepreneurs will be shoveling their profits over to financier middlemen, leaving zilch for pay raises and an increased living standard to their employees.
John V

Sandwichman said...

john,

I think what you characterize as "self-contradiction" is precisely why Keynes viewed investment as "first aid" only. Spending on capital goods raises consumption BEFORE it increases production. It is this time lag that makes investment a solution for only a limited time.

John Vertegaal said...

Spending on capital goods is at best neutral; that is if it decreases unemployment at the same time, so that the direct spending can be supposed to be done by the newly hired. The problem with Keynes's model is that it's overdeterminate. Spending on capital goods determines capital value, which then becomes determined all over again through the direct spending on its output. Keynes is trying to have it both ways, by putting a positive value on capital that may never see a return; and which thus instead would be much better classified as a to be resolved debt. Furthermore, with economy-wide capital depreciation allowances already accounted for in the cost of retail output, a separate investment account becomes superfluous too. The power of investments just isn't what it's cracked up to be, in mainstream or keynesian models; and a realistic depiction of our economic structure requires an altogether different model, going well beyond Keynes
John V

Sandwichman said...

a realistic depiction of our economic structure requires an altogether different model, going well beyond Keynes

I don't disagree. What I'm suggesting, though, is that those who invoke Keynes in support of their flaccid prescriptions for economic viagra fall far short of their leading light.

daniel said...

This is a great post Dmitry. I just had one of the ‘Doh!’ moments and ran back to correct my own site before publishing my comment. You see my own comment form did not match what I’m about to advise. I get less comments than you, so never noticed any problem. I’ve changed it now anyway so here goes.


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