Monday, April 2, 2012

Catalan on Keynes, Chapters 1 and 2

Jonathan has started blogging on Keynes as he works through the General Theory. The intent is to present Keynes, rather than argue with him too much. As best that I can, I'm going to try to follow along and poke around in each of the chapters as Jonathan works through them, and share thoughts if I have them.

Chapters 1 and 2 just set out Keynes's project in relation to the Classical economists. There's some introductory material, and then Jonathan comes to this:

"Keynes also notes that the relationship between nominal and real wages tends to be inversely direct, in that as nominal wages rise real wages fall and vice versa.

Concludes Keynes, if it were true that below the market clearing price no greater supply of labor would make itself available, then in reality we would not see involuntarily unemployed persons despite a fall in real wage rates (i.e. as occurs during periods of depression). Therefore, real wages are not a good indication for what the marginal distutility of labor is (a subjective factor)."

This is actually a point that Keynes left up towhat he called a "statistical enquiry", although his expectations were exactly as Jonathan suggests. That statistical inquiry was done shortly after the General Theory was published by Lorie Tarshis and John Dunlop (the former a student of Keynes and the latter an advisor... if my memory serves me correctly... to Richard Freeman - my personal favorite labor economist). They found that that relation actually didn't hold. More details on that in a retrospective from Dunlop here. You get that a lot from Keynes - some speculation with the qualification that experience will have to tell us whether or not its actually true.

I am inspired to revisit his discussion of involuntary unemployment after reading this. I remember not liking it, because it too closely resembled the "labor surplus" view of unemployment, which I don't think is helpful at all for understanding what we mean when we talk about unemployment. But the way Jonathan describes it in his section IV, I wonder if I need to reassess Keynes on that.

Say's Law comes up too. My view is that there are some problems with Keynes's presentation of Say's Law, but that it works effectively as a heuristic (or a strawman, if you prefer to put it that way) to help put his ideas into an understandable context. It's important in reading this section to note that he says few of the classical economics ever committed these fallacies as blatantly as he puts them, but that their views essentially boiled down to these fallacies. That's a really critical difference.

One other thing I'd note - the "disutility of labor" point about labor supply is a natural, but nevertheless a very old way of thinking about labor supply. You will never learn this in a modern labor economics class - you'll learn the labor/leisure model. Disutility may come in during discussions of compensating wage differentials. I wonder sometimes whether it makes sense to do this. The cost of work is not just that you lose leisure. It's that work is... well... work! I like to stay occupied. I would occupy myself doing something without work. It wouldn't really be leisure, it would just be a more pleasurable kind of work. So the way economists think about labor supply has changed over time, and it's not clear to me that we've hit on the ideal approach yet. One thing that I think is neglected is norm formation on labor supply. Most people don't work forty hours a week because that's where their labor/leisure tradeoff optimizes. It's simply not true. We work forty hours a week out of convention. If we come up with a theory of how a convention like that emerges, and combine it with equal parts (1.) household bargaining model, (2.) labor/leisure model, (3.) compensating differentials model, and (4.) occupational choice model, then I think we'll have a pretty solid labor supply theory.

1 comment:

  1. I wonder if Jonathan can derive the model found in Book V of the General Theory. Book V contains Chapter 19: Changes in Money-Wages, Appendix to Chapter 19: Professor Pigou's "Theory of Unemployment", Chapter 20: The Employment Function, and Chapter 21: The Theory of Prices.

    Granted, Keynes's model is dispersed throughout the entire book, but it is in these three chapters that the technical foundations are most developed. See the equations on Pages 282 to 286 and Pages 304 to 306 especially.

    For further assistance in deriving the model of multiple equilibria, I recommend reading the papers of Dr. Michael Emmett Brady. (Particularly his 1996 article in the History of Economics Review on James E. Meade and John Maynard Keynes and his two articles in History of Political Economy.)


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