Friday, August 6, 2010

Kling on Keynes and Bohm-Bawerk

One more post today, also on Kling, also on competing macroeconomic theories.

He shares an essay on "labor as capital" and a Bohm-Bawerk type model of the economy vs. what he contends is the Keynesian picture. I haven't read it yet, but it sounds interesting. This is the quote he highlights:

"If labor is capital, then we have lost the automatic tight connection between spending and employment. Firms can vary their output with little or no variation in employment. This explains how we can have a "jobless recovery," meaning a large percentage increase in output without a comparable percentage increase in employment."
I think this is a good point. I don't think you can read the literature on labor contracts, search theory, or labor flows and not conclude that to a certain extent labor does act like capital. I've always liked these points from Kling. Of course as I've opined before, I don't think this provides any reason at all to discount the Keynesian liquidity preference story - which is what motivates the effective demand arguments that Kling discounts here. Corporate liquidity preference explains jobless recoveries just as well. Kling and Keynes do just as well explaining why new hiring doesn't happen - but Keynes arguably does better explaining the coincidence of a failure to hire in addition to high profit rates (I'm not sure how the "labor as capital" story explains that, although perhaps it does). Now when I say this is a "Keynes" point, what I really mean of course is that it is an application of Keynesian insights about liquidity preference. I've mentioned before that Keynes doesn't seem to sketch out this relationship in the General Theory as well as he could have.

As I said in this recent post, there's no reason to treat two theories as opposing theories unless they actually contradict each other. I think the Kling/"labor as capital"/Bohm-Bawerk approach makes great sense, and I see no reason not to think both that and the Keynesian's story are going on.

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