Leave your comments here on Keynes and money wages

Apparently Typepad doesn’t understand economics.

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Several things.
First – “But to a first approximation, prices would also have been 20 percent lower”

It always begins “But to a first approximation” doesn’t it? Regardless of whether some or all wages drop, this can have an effect. Firms have to buy capital and labor, labor becomes cheaper and they can hire more. Simple. The tricky assumption Keynes used to kill this outcome is: “labor as the primary source of marginal cost (true in many but not all sectors)” — but it is not only not true in all sectors, but it is also irrelevant to entrepreneurship, investment, expansion and long-term planning.

If I am deciding, during a recession, whether I want upgrade some technology in order to service more areas or hire labor in order to expand the areas I already service, for example, the price of labor relative to capital will certainly enter my decision. This is not only true for real expansion, it is also true for adjustments when capital is depreciating. This is basic micro and is dead obvious to anyone not hypnotized by the Keynesian Fairies.

Second, Tyler says:
I believe Keynes’s “falling nominal wages-falling prices-constant real wages-constant unemployment” scenario does hold for some of the 1929-1932 period and indeed I have argued as such in print. But once we get into the Roosevelt era, we have government propping up some wages above market-clearing levels and thus higher than necessary unemployment.

But, Hoover propped up wages too. I think it would take a lot of very good historical work to show that Keynes was right at any time — it does not strike me as obvious. Unemployment remained high under Hoover because he (a) propped up wages, (b) increased tariffs hugely and so caused a global trade war that freaked out business and hammered the stock market, (c) engaged in other activist policies that disquieted business, preventing investment and expansion, including finally hiking taxes.

can someone explain the difference between real wages and money-wages?

Tim,

Money wages are nominal wages. It’s the literal $100 bucks you receive. Real wages are the conceptual “real” wages that are equal to you nominal wage less inflation.

1) Running through most of these comments is a common thread: Keynes, it’s assumed, thought the unusually high levels of unemployment in the Great Depression could be traced to money wage-stickiness in the presence of a falling price level.

There are two things wrong here with this thesis, it seems. First off, Keynes didn’t originate it; others, not least Albert Marshall and his wife, had developed it decades earlier. More significantly, though Keynes agreed that falling money wages might help reduce unemployment, he clearly regarded this policy as unreliable for dealing with the Great Depression levels of it.

†¦†¦

2) In particular, regarding money-wage stickiness, Keynes thought that even if cutting money-wages was feasible — and on that score, note in passing, he was one of the very first to consider the large variety of contractual obligations that might prevent this ever happening in a modern economy — such cuts were likely to be indeterminate and unreliable amid the dire circumstances of the 1930s.

Why? For one thing, wage- cuts might have adverse effects on the expectations of lots of key economic agents . . . especially in the presence of not just a low price level, but a falling one. Business owners couldn’t even be sure what the real wage would be if their expectations about falling prices proved right. For another thing, Keynes worried that the Federal Reserve — or its equivalents abroad — would not keep the money supply constant and instead shrink it once deflation slowed down or stopped.

…….

3) Want some concrete evidence here? Well, consider the title of his major work under discussion here.

More specifically, If wage stickiness was the key issue for his 1936 book, why wasn’t it entitled — as David Laidler once noted a few years ago — The General Theory of Employment, Wages, and Fiscal Policy? Instead, of course, he called it The General Theory of Employment, Interest, and Money And that title brings us to the heart of his theoretical concerns.

……..

4) To put it tersely, throughout the General Theory, Keynes was mainly concerned with psychological and motivational matters on the part of savers, investors, firm-owners and managers, workers, and the Federal Reserve . . . above all, their expectations, investors animal spirits, their liquidity preferences that varied widely over different time periods — inter-temporal matters — and what we would now call coordination problems that resulted in a general economic equilibrium world-wide in capitalist economies way below full employment. And the major cause of these coordination problems, understood against the background of these influences — which is virtually ignored in mainstream New Classical theory (and even by most so-called New Keynesians)?

Quite simply, the failure of “the interest rate† to line up savings held by major capital holders with private investment.

†¦.

3) What about the money side in the book’s title? Here Keynes — the pioneer of monetarist theory as Friedman rightly noted — says somewhere in the book that he thought increasing the money supply would be a better policy alternative than the uncertainties surrounding money wage-cuts in the face of a falling price level. Only we know that Keynes rejected it as unreliable too — enter, center-stage, the liquidity trap.

†¦……

4) Which brings us to the interest rate — similar to Wicksell’s analysis of the “natural rate† that would equate savings and investment at a full-employment level, in contrast to the prevailing “market† rate.

With his stress on individual expectations, shifting animal spirits, shifting liquidity preference, and the development of a complex, full-fledged money-and-credit-based economy as a financial intermediary between economic agents — especially savers and would-be investors — Keynes argued that the coordination of savings and investments might go astray and fail to push the economy’s growth to full employment. This coordination problem wasn’t entirely new with Keynes. Wicksell and some other economists had recognized it too.

…….

5) What was highly original with Keynes was how he explained the coordination breakdown:

†¢ The multiplier effects of the discrepancies between S and I, which could have huge spiraling consequences on economic output below full employment.

†¢ Leakages from the spillover multiplier-effects owing to varying levels of household savings, not least according to income.

†¢ More generally and radically, then, it was variations in income and employment that actually coordinated S and I, not the rate of market interest.

†¢ What followed? In a complex money economy marked by wide swings in savers and investors optimism and pessimism, so Keynes argued, it was unlikely except by chance that the level of private investment would be high enough to absorb the volume of savings needed by the economy to operate at full employment.

†¢ Added to Keynes own pessimism here was a view — widespread by the mid-1930s — that in mature advanced economies, capital accumulation was so high that there would likely not be enough profitable investments to generate effective aggregate demand to operate the economy at full capacity and produce the goods and services that it was capable of.

——- As a result, unemployment of a high sort would likely be chronic and built-into the economy. The Great Depression might not be a kind of perverse disequilibrium. It might be the future of capitalism in an economy with a low marginal productivity of capital and huge coordination problems — psychological at bottom but mediated by financial markets — that brought S and I together at full employment equilibrium.

†¢ Enter Keynes policy advice, which (contrary to a lot of opinion) he didn’t elaborate on much. In particular, if the private economy — C and I — couldn’t generate enough output of goods and services to produce full employment, it was the job of the government to do so through fiscal policy.

†¦†¦†¦†¦†¦..

Michael Gordon, AKA, the buggy professor

PS The David Laider article-ms referred to can be found here Entitled “Keynes and the Birth of Modern Macroeconomics† — Laidler himself a prominent pioneer of monetary theory — it is a concise summary of his impressive research published in earlier years (before 2005) in articles and books. Can’t be overly recommended.

Thus, the central theoretical revelation of the General Theory was that, in a money
economy, variations in income and employment, not in the rate of interest, are the primary factor
co-ordinating saving and investment. At the same time, there seemed to be no reason why the
level of investment would, except by chance, be sufficient to require the volume of savings that
the economy would generate at full employment. Indeed, in mature economies such as Keynes
took those of Europe and the United States to be in the 1930s, the availability of profitable
investment projects was bound to be low and shrinking, animal spirits were likely to be
permanently depressed, effective demand would fall short of the economy’s capacity to produce
goods and services, unemployment would be chronic, and far from being a symptom of some
kind of disequilibrium soon to be eliminated by market forces, it would also be an equilibrium
phenomenon.

.

…

3) Keynes makes it clear, then, that he’d prefer to see the money supply increased — yes, remember, he was the first monetarist as Friedman notes (his Treatise set out the theory of liquidity preference in this regard, with its stress on the psychology of wealth-holders and others. Still, he wasn’t sure such an expansion would work, given a liquidity-trap.

….

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It is based on the assumption that there is really only one input. That’s fine if we’re in a one sector economy where your capital today is made by labor and capital yesterday so that we can effectively pretend capital is labor.

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Excellent tips .I really appreciate all these points, and I agree completely†¦
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