A while ago, my stoush with US economist Stephen Williamson over his attack on Zombie Economics (in some blog posts and what was presented as a review, for the Journal of Economic Literature) attracted a fair bit of attention around the Intertubes. Now Williamson’s longer review, to which I briefly responded here, has turned up in Agenda, published by the ANU School of Economics.
There’s a history here. Way back before blogging was born, the current editor of Agenda, William Coleman co-authored a book, Exasperating Calculators, published by Keith Windschuttle’s MacLeay Press in which I got a brief but critical mention, along with lots of others. I wrote a fairly scathing review (over the fold, also with a review of a book by Wolfgang Kasper) and I think there may have been one or two more rounds.
So, I wasn’t all that surprised to see Williamson’s piece appearing in Agenda, although I do feel (given Williamson’s putdowns of me as an Aussie yokel, and member of the “farm team”) that they could have tried for an Australian, instead of an import on this occasion. I don’t have time for a full-length response at the moment, except to say that I don’t think Williamson really engages with my argument at any point.
Quiggin, J. (2001), ‘The economic rationalists strike out’, Australian Financial Review, 6 April. Review of, Building Prosperity: Australia’s Future as a Global Player by Wolfgang Kasper (2000) and Exasperating Calculators: The Rage over Economic Rationalism and the Campaign against Australian Economists by William Coleman and Alf Hagger (2001).
It is a brave economist who revisits the predictions they made twenty years ago, particularly if those predictions were accompanied by policy advice, and that advice has been followed. If your advice has been rejected, it is usually easy enough to find some subsequent disaster and say ‘I told you so’. But economic outcomes are so hard to predict and control, and effective advocacy requires such a high level of optimism, that the successful advocate is almost bound to be disappointed by the outcomes.
Wolfgang Kasper is not deterred by such considerations. In 1980, along with four other eminent Australian economists, he published a book entitled Australia at the Crossroads, advocating a program of radical microeconomic reform. The book contrasted two possible paths for Australia, referred to as ‘mercantilist’ and ‘libertarian’. The mercantilist path was seen as a continuation of the policies of the post-war period and was described as involving:
• protection against import competition
• protection against changes wrought by new technologies
• maintenance of restrictions on capital inflows and on free competition in capital markets
• defence of a fairly rigid system of relative occupational wages and of real wages irrespective of market forces
• continuation of an extensive government role as benevolent provider of many basic services including education, health and welfare
• government by lobbying and associated control by producer groups with short sighted policies aimed essentially at winning the next election
• consumerism and environmentalism supported by bureaucratic regulation
The libertarian alternative path involved
• free international trade
• acceptance of the structural changes wrought by new technology and the removal of protection
• elimination of restrictions on international capital flows and on free competition in the domestic capital markets
• resolute application of anti-monopoly and restrictive trade practices legislation
• deregulation of many markets and other activities, especially in the area of entry by persons and firms that want to compete
• greater variation of occupational wages and of real wages in response to market forces
• reduction of the government’s role as a producer of many basic services, including education, health and welfare
• expansion of the government’s role as a provider of income maintenance
Using scenarios devised by Kasper, the Crossroads group estimated that the mercantilist approach would yield annual growth in income per person of 1.7 per cent, while the libertarian approach would yield growth of 3.8 per cent. Over 25 years, the resulting income gap is around 25 per cent.
With the wisdom of hindsight, it is easy to see that nearly all the items on the libertarian agenda have been implemented. Kasper appears satisfied with the result. Over the period since 1975 income per capita has grown by 1.8 per cent annually, a result which Kasper describes as ‘an acceleration’ and ‘not overwhelming but not disastrous’. In order to achieve this rate, as he says, Australians have been forced to ‘work harder and to compete’.
Alert readers will have noticed a problem. Isn’t growth of 1.8 per cent what we were supposed to get under the dismal Mercantilist scenario? And at least in that scenario we got to be ‘relaxed and comfortable’ instead of hard-driven and competitive. Is it any wonder that Australians are less than thrilled with radical microeconomic reform ?
Kasper has two answers to this objection. First, he says the reforms were delayed and only partially implemented. Second, he relies on Productivity Commission research, drawing on ABS data, which shows that productivity accelerated dramatically towards the end of the century, from a historical average rate of 1.2 per cent to a 2.4 per cent for the period from 1993-94 to 1997-8.
On the first point, it is worth noting that in many areas reform went further than the Crossroads group dreamed possible. For example, they did not seriously discuss privatisation and they envisaged a more extensive role for the Arbitration Commission than is involved in the system of enterprise bargaining introduced in the early 1990s.
On the second point, Kasper, like many other economists, failed to note the publication, without much fanfare, of revised statistics in 1999. These lower the productivity growth rate for the for the period from 1993-94 to 1997-8 to 1.7 per cent, and showed productivity decelerating in the late 1990s. The long-run average was also revised downwards, but only to 1.1 per cent. When proper account is taken of cyclical factors (productivity always grows faster in expansions) and other data problems, the revised data give little or no support to the idea of a productivity ‘miracle’ or ‘new economy’.
Whatever the problems of past predictions, Kasper is happy to offer new ones. This time he offers a ‘cricket’ scenario based on backsliding into regulation, and a ‘bee’ scenario based on more extensive economic liberalism. The cricket scenario, he claims, will yield annual growth in income per person of 1.25 per cent over the period from 2000 to 2025, while the libertarian approach would yield growth of 3.0 per cent.
These predictions are basically the same as those in Crossroads, except that both are a bit more pessimistic and probably therefore more realistic. More importantly, by 2025, both Kasper and his critics will have long since been replaced by other economists debating other issues.
By contrast with Crossroads, Kasper’s policy proposals this time around are surprisingly ill-defined. He has abandoned belief in ‘expansion of the government’s role as a provider of income maintenance’ (actually, I suspect this was a compromise forced on him by his co-authors), and now denounces the welfare state. He wants to limit public spending to 25 per cent of GDP. But nothing is spelt out, and most of the advocacy in the book deals with tired ideas for constitutional reform (community initiated referenda, term limits, a Hayekian ‘Third Chamber’ and so on).
A final comment relates to Kasper’s subtitle ‘Australia’s future as a global player’. I can only assume that this nationalistic phrase, quite inconsistent with Kasper’s libertarian stance, was added for marketing reasons. Readers looking for any discussion of strategic industry policy, the ‘branch office economy’ debate, or anything else that might be suggested by this subtitle, will be sorely disappointed.
Another look at old debates is provided by Coleman and Hagger, who revisit the debate launched by Michael Pusey’s Economic Rationalism in Canberra in 1991. Their book, Exasperating Calculators*, is indeed exasperating. Whenever the authors make a definite statement about their own beliefs they appear eminently reasonable. Using the method of selective quotation favored by the authors, it is possible to produce the following summary of their argument:
(1) Economic rationalism is highly unpopular in Australia, indeed the Economic Rationalist is a ‘folk devil’ (p 299)
(2) This is also true in the rest of the world ‘By the mid-1990s, Economic Rationalism – Rogernomics, Thatcherism, Reaganomics– was politically spent’ (p 261)
(3) ‘In the mind of the Economic Irrationalists [Pusey, Manne and others], it is economists who have brought about Economic Rationalism’ (p 289)
(4) But in reality, ‘pure neoclassical theory cannot be identified with Economic Rationalism’. The majority of Australian economists ‘strongly disagreed with the proposition that government outlays should be reduced as a percentage of GDP’ and ‘the stereotyping of the Professoriate as uniformly Rationalist is wrong’ (pp 206-207)
(5) Moreover, there is little evidence to back the strong claims made by Economic Rationalists ‘We do not mean to suggest, for example, that the fact that industrial production grew by a smidgen more under Thatcher than under her predecessor vindicates her policies’ (p 82)
(6) Economists should educate the public about the points on which they agree, in particular the point that there is an extensive role for government intervention, including, but not limited to, externalities, public goods and macroeconomic stabilisation. In particular, economics does not support a presumption in favour of small government: ‘as far as economics is concerned, the size of government doesn’t really matter’ (p 259)
From this summary, it would be reasonable to conclude that the authors endorse the judgement they correctly attribute to this reviewer ‘[Quiggin] agrees with the Economic Irrationalists about the [adverse] impact of Economic Rationalism. But he disagrees with their remedy: get rid of economists’.
Unfortunately, the quotations presented above give a highly misleading picture of the tone of the book as a whole, which is more accurately summarized by the use of the term ‘Economic Irrationalist’ as a pejorative label for opponents of ‘Rogernomics, Thatcherism and Reaganomics’. In a continuous series of sly asides, pointed footnotes and pedantic quibbles, it is made crystal clear that the Economic Rationalists are the good guys and that anyone who opposes them (or even fails to defend them with sufficient ferocity) is an enemy of reason and progress.
Unfortunately, as the authors have observed, the majority of Australian economists fall into the latter class. As a result, although the authors claim to be responding to a ‘campaign against Australian economists’, their book contains more personal attacks on Australian economists, living and dead, of all schools and persuasions, than any other volume I have read. Those denounced include H.C. Coombs (‘elderly’ and ‘nostalgic’), Russel Mathews (‘frenzied’), Geoffrey Brennan (an ‘appeaser’), Stephen King and Peter Lloyd (‘indefensible’), Clive Hamilton (‘florid irrationalism’), Ted Wheelwright (‘insignificant’) and even Wolfgang Kasper, among many others. (The present reviewer gets off relatively lightly, as a ‘distinguished economic theorist’, who is prone to ‘foolishness’ in matters of policy).
A couple of professional economists of the free-market persuasion (John Freebairn and Ian Harper) are favorably mentioned in passing. But the real defenders of Australian economics, it seems, are three writers who have abandoned the economics profession for right-wing politics: John Hewson, P.P McGuinness and John Stone. With friends like these, those concerned with the public image of the economics profession may well ask, who needs the enemies attacked by Coleman and Hagger?
Coleman and Hagger claim to promote values of academic integrity, trashed by the Economic Irrationalists, but conspicuously fail their own tests. They criticise the ‘Irrationalists’ for offering various and inconsistent definitions of Economic Rationalism, then fail to offer any definition of their own. This does not stop them from making throwaway statements to the effect that particular policies and ideas are, or are not, consistent with Economic Rationalism.
They criticise statistical claims made by non-economists like Manne and Pusey, but play fast and loose with the data themselves. A typical example is the following (p 113) ‘Pusey in February 1992 diagnosed the New Zealand economy as dead in the water. Over the next five years, New Zealand’s real GDP rose by 22 per cent’. Why, one might ask, does this refutation refer to a five-year period? Coleman and Hagger know, but unwary readers may not, that after a five-year recovery, the New Zealand economy relapsed into recession in 1997, and was once again ‘dead in the water’ by the late 1990s.
More trivially, Coleman and Hagger make repeated fun of Pusey’s misspelling of proper names. Yet they refer to their prominent colleague, Wolfgang Kasper, as ‘Kaspar’. Fellow-economist Brian Dollery comes off even worse, appearing as ‘Brean Dollery’ in the text and ‘Brean Dolery’ in the index. It is hard to avoid such errors, but those who live in glass houses shouldn’t throw stones.
Connoisseurs of vituperation, a field in which Australians have long excelled, will find this book a worthy addition to their shelves. Those looking for a balanced view of economic rationalism and its critics would do better to seek out the ‘indefensible’ volume edited by King and Lloyd.
Wolfgang Kasper (2000), Building Prosperity: Australia’s Future as a Global Player, Centre for Independent Studies, St Leonards NSW, 118 +xxv pp, $27.45.
William Coleman and Alf Hagger (2001), Exasperating Calculators: The Rage over Economic Rationalism and the Campaign against Australian Economists,MacLeay Press, Paddington NSW , 336pp, $24.20
see also
King, S. and Lloyd, P. (ed.), (1993) Economic Rationalism: Dead End or Way Forward?, Allen and Unwin, St. Leonards, NSW.
* The title is drawn from Hancock’s Australia which has lots of neat quotes about Australian attitudes to economists. This was a fairly obscure work by the 1990s, but I cited it on exactly this point in my 1996 book Great Expectations, a fact not mentioned by Coleman and Hagger. Just sayin’.
John Quiggin 
John, This piece needs some editing. Something is wrong with its disjointedness.
On William Coleman. My guess is he sought something critical on your book because he is doing his job as an editor of a public policy journal. I doubt there is a sinister right-wing plot behind publishing this review of your book.
And thanks to the economic rationalists for killing non minerals & resource driven manufacturing in this country. Good on you economists who still claim the Free Trade Agreement with the US as such a virtue for us even with years of clear evidence that’s it’s a one way street [deep sigh]
Of course they would be plotting, they spend their time doing little else. But from your perspective, John, the whole Williamson and Co. crusade must be a source of continuing amusement. Maybe you should get a tax deduction? After all, it must be considered a philanthropic act, having given someone like Williamson a cause, and hence, having introduced meaning into his life. By the way, what is going on with Agenda? No issues, then suddenly several issues one after the other. In the case of Agenda, maybe the market is failing? I didn’t know Coleman edited a public policy journal. Maybe editing that journal is what has been taking up his time? Maybe if he is that busy he should hand his editorship of Agenda on to someone else?
That crowd shows that although the unexamined life might not be worth living it remains as popular as ever.
What would left of economics if the manichean narratives were excised?
I meant:
What would be left of economics if the manichean narratives were excised?
Are you saying that market liberalisation didn’t have a positive impact on GDP per capita? I think the evidence is pretty clear Australia would be poorer today had those reforms not taken place.
@Justin Campbell
I would also be interested to hear John’s answer to that counterfactual question. I don’t believe the evidence is clear.
@Justin Campbell The obvious problem with the claim that market liberalization greatly increased Australian income is that NZ adopted more extensive reforms and its experience has been miserable.
There are a lot of factors to be considered, but the immediate cause for Australia’s current prosperity is that we haven’t had a recession for 20 years. That can be explained by good luck or good management, but not by market liberalization – in general, countries that undertook a lot of liberalization have been particularly vulnerable to the global finaancial crisis.
That said, plenty of aspects of liberalization were beneficial. However, the total effects were modest, and partly offset by negatives, such as financial deregulation (particularly in the 1980s).
Definately true of NZ most countries at the top of the World Banks ease of doing business and the Index of economic freedom tend to the wealthier nations but NZ is a worrying exception. Similar to countries in the developing world who can’t repeat the experience of the asian tigers.
@HC I have no problem with William Coleman commissioning a review article on my book, and no expectation that it would be favorable. I just think he could have found a better reviewer here in Australia.
Don’t worry John I’m reading your book now for my blog http://www.econstudent.org, so far so good. My mum and a few of my friends might consider buying it. 🙂
Are there any suggested sites or distributors to buy the book in oz? A Google search comes up with Princeton University Press?
@Troy Prideaux
I got mine from Book Depository, which is a wonderfully amazing site giving its overseas customers the benefit of the UK’s subsidy on postage for int’l retail.
Needs editing? Nah, rollicking good fun.
Nice to have you back on the farm in Iowa, Johnny Appleseed..
I agree with the point regarding Paddy Maguinnes, the volume of relevant work from rightist economists would be about what you’d expect from a dead man.
Thanks Dan!
@Troy Prideaux
Other recent acquisitions:
http://www.bookdepository.co.uk/Enigma-Capital-David-Harvey/9780199836840
http://www.bookdepository.co.uk/Long-Twentieth-Century-Giovanni-Arrighi/9781844673049
http://www.bookdepository.co.uk/Requiem-for-Species-Clive-Hamilton/9781849710817
http://www.bookdepository.co.uk/Only-Death-is-Real-Tom-Gabriel-Fischer/9780979616396
😛
@Justin Campbell
These one dimensional statements tend to destroy the credibility of economics.
Ethics and morality intrude. It is also clear that market liberalisation has had a negative effect on debt levels, wealth distribution, financial security, and working conditions.
You can boost GDP by attacking society under a banner of “market liberalisation” or “de-regulation” and etc. It all depends how you balance the needs of humanity against the needs of corporations.
The growth in GDP per capita after 1999 is unexceptional and probably not much greater than the growth in per capita GDP before the eco-rats came onto the scene.
The real reason we have this chant of “market liberalisation” is ONLY due to the needs of capitalism to counter its inherent ratcheting crisis tendencies. We have been lucky in that GDP per capita has continued to grow as before.
I got mine on amazon for the kindle app, on my android tablet. As to @Chris Warren I’m at work and don’t have time for a long reply. I will just say when people advocate ‘ethics and morality’ justifying government interference in markets they are really advocating for the vested interest of rent seekers and the genuine poor in our society are often the losers.
On another point, I do believe that finance in this country and globally has a massive principal-agent problem and finances ability to misallocate capital for short term interests of agents is a serious problem. I believe its very difficult to regulate and with the advance in technology there is no guarantee that todays regulation is protection from tomorrows financial products.
@Justin Campbell
Justin is a good example of what is coming out of universities at the moment.
For the record – our GDP per capita shows no variation in trend that can be associated with “market liberalisation” [Just graph series A2304336L from ABS 5206]
But most economists ignore the real problem, in that over the period the ABS publishes this series, per capita GDP has collapsed (once you account for inflation).
In 1973 GDP per capita was $7743,
GDP per capita in 2010 was around $14,656.
This is glacial growth over 37 years.
The only way capitalists can cope with this is by increasing the gap between rich and poor and shifting some consumption onto debt (plus of course manipulating Third World economies).
This is how they express their vested interests.
If we forget about population, and look just at GDP, we can see that percentage growth was high in the 1959- early 60’s (around 1.2% per Q), but is now around 0.7% per Q. [See series A2298668K] and there is a long-run trend down.
This suggests that all the changes from Whitlam, Fraser, Hawke and Keating have been a total disaster for the Australian economy. We can only survive by begging China and the rest of the world to be nice to us.
(I leave aside for the moment about how to deal with debt increases and how these impact on GDP data.)
From the various charts that can be created from ABS data – none shows any benefit from this eco-rat “market liberalisation”.
@Chris Warren,
Maybe you can fly to Boston and stage a walk out of one of Greg Mankiw lectures. After all, the teaching traditional economic theory is all just a big capitalist conspiracy.
@Justin Campbell
Are you sure it’s not the otherway around? The neoclassical or neoliberal economic theory is what I consider to be the big capitalist conspiracy. If you feel this way about traditional economic theories then you should probably point out why is income inequality is becoming larger, the increase in foreign debt level in mainly private sector and the ability of big banks and corporations to hold the government hostage. I don’t even want to include the impact on work/life balance, job security and investment bubbles that causes impact especially in housing into the picture.
@Justin Campbell
That may be useful.
Joan Robinson would probably agree with you about traditional economic theory, but she would know how to express herself without creating cartoon imagery.
@Justin Campbell
Seriously speaking, I just checked out your blog and spotted very nice looking labour supply and demand diagrams in a post where you advocated removing minimal wages.
Could we explain the bankers and corporation executives salaries and bonuses using these diagrams in terms of the equilibrium of supply and demand on the job market (and presumably the marginal revenue productivity of the executives)?
From The Telegraph, 10 Jan 2011
“A survey last year found that 2,800 bankers received £1 million or more as a bonus. It has been reported that Stephen Hester, the RBS chief executive, is in line for £2.5 million and in total, City bonuses could reach £7 billion. ”
So what should we advocate as a solution?
“when people advocate ‘ethics and morality’ justifying government interference in markets they are really advocating for the vested interest of rent seekers and the genuine poor in our society are often the losers”
Oh we have a “principal-agent problem” but we cannot do anything about it because this would hurt the genuine poor. This sums up nicely the mainstream economics to me – I don’t need any conspiracy theory.
Well, can I say that the wages paid to corporate CEOs are disgusting. Clearing, there is something fundementally wrong when poorly performing executives can pay themselves the equivalent of a lottery winning and institutional investors do nothing. There seems to be some improvement here but I agree with Prof. Quiggin’s comments in his book about this issue.
About inequity I’m not sure how we can increase the productivity of the bottom 20% to allow them to get a greater piece of the pie.I do know however, it will be through building peoples skills and ability, maybe addressing the fallout from marriage and family break up.
@Adam (ak)
Yeah, is the trend (in oz) really as bad as the excel chart (2nd sheet) linked to Andrew Leigh’s latest blogging? That’s a scary looking curve!
@Justin Campbell
Do you suggest that people are unemployed because they have low productivity or don’t have skills which are in demand and if their productivity / skills improve they will be hired?
(Let’s consider not only Australia but also US and Europe e.g. Spain)
What if there are simply no jobs available? Will more positions be available if we have more people with skills? I am not suggesting that there are currently no vacancies which are not filled because of the lack of skilled people but let’s assume that we have trained some of the unemployed people and we have filled all the available vacancies. Of course there will be some increase in the GDP if that happens but will this be enough to create jobs for everyone?
So why do you think that the minimum wage should be removed? Would it affect the other workers? How would paying workers less (deflating the wages) affect the ability of some of them to service their debt?
@Justin Campbell
“About inequity I’m not sure how we can increase the productivity of the bottom 20% to allow them to get a greater piece of the pie.”
Are you being serious to put on a statement like this? I’m not too sure on this one but let’s suppose the bottom 20%’s productivity is lower than of the 40-80%. I’m pretty sure the CEO’s don’t even have close to 100 times of the bottom lower 20%, yet a lot of them receive more than 100 times of of bottom 20%’s wage. You can’t link wage level with productivity, even in real life if your productivity has increase you won’t necessarily get a wage rise, you might even get a wage cut when the economy is in recession. If the real life economy wage rise follows the productivity, the current inequality of income will be much lower.
Also lots of unemployed has more than enough skills/knowledges/experience to work in Aus, US or UK. It’s easy to think people are just fools/useless/lazy except ownself isn’t it?
@Chris Warren
Study some economic growth theory! As per capital GDP increases relative to the world leader (together with per capita capital stock) growth slows down. Australia started the post war era with a capital stock that was stunted by the great depression and slow growth 1920s. This meant that the marginal product of capital was high and that growth was easier to come by. Since then, the capital stock has increased/converged and per capita growth has to come from increases in total factor productivity, which are much harder to achieve.
@Tim Peterson
Growth need never slow down – this only occurs where it is calculated as a rate of return on “capital”. Without this, you can always have an increment of new wealth depending on the propensity to save vs consume, and natural variations changing the conditions of production. Although growth based on debts, inflation or IOU’s will obviously slow down but this is an unnatural circumstance that is not very interesting.
If markets were truly free “capital” could not earn any return above the wage for the organiser. With free entry, any other impost gets competed away.
Even if we fantasise about ‘capital stock’, this will not lead to any ratchetting difficulty to increase in total factor productivity, because – assuming market socialism – every producer has the same rights to capital and information. In this case the only increase in productivity is the skills and effort by which labour works with the tools and materials at hand. All is reduced to labour productivity.
True growth only occurs by increased labour either through skill (qualitative) or population increase (quantative). And this is recession proof.
To note one of my personal idee fixes of relevance: As Robinson, Samuelson, Sraffa, Shaikh, Steedman, et al, and more recently Keen have repeatedly pointed out, no-one has yet shown any solution to the Capital Aggregation problem. “Capital” cannot be added up – therefore, the idea of a “marginal return to Capital” is bogus, as is the more general idea that markets reward “factors of production” according to their “marginal contribution”. This is a nice Clarkean fairy story for indoctrinating Mankiw’s first years like Justin Campbell above, but has bugger all to do with either logic or facts. Its ideological purpose is clear when we see that Justin freely uses it to argue against a minimum wage. What is it about econ students that they all think Dickensian London is the highest point of civilisation? Why are they so keen to go back there? Did someone eliminate economic history from the curriculum? (stupid question – of course they did)
More specifically, there is a perfectly adequate macroeconomic argument for why minimum wages are a good thing. Minimum wages go to people with a high (100% or close to) propensity to spend. When they spend them it creates demand. Increased demand means more production, sales and services which means more jobs providing these things; often jobs at the low end of the income scale, so a virtuous cycle is created.
The real objection (and the real reason for the push for “increased productivity”, that is, work more for less) is that higher wages mean lower profits. That Higher Profits have repeatedly and seemingly inevitably led to “private affluence, public squalor”, followed, after the inevitable bust, by private squalor as the nouveau riche discover they have blown their money on real-estate bubbles, wall street cocaine binges, currency speculation, ponzi schemes, etc, seems to escape your typical econ student. But then, as I said, economic history has been eliminated from the curriculum in most institutions.
There is nothing ‘fair’ if factors of production were rewarded their ‘marginal product’. All marginal products are conditional on all inputs. Marginal products are not determined by that input alone, hence although consistent with factor payments in a perfectly competitive economy with constant returns to scale there is nothing necessarily fair or just about the resulting distribution of income.
@Chris Warren
The marginal product of capital is not just the return to capital, it is also the increment to growth resulting from an increase in capital stock. As this falls with the increase in the capital:output ratio, growth slows (given constant investment share in GDP).
Even if the marginal product of capital is always positive in terms of gross domestic product, it is not always positive in terms of domestic product net of depreciation. The ‘golden rule’ maximum level of consumption occurs where the MPK is equal to the depreciation rate. Any capital accumulation beyond this (constantly increasing) level requires permenantly lower consumption, as net product falls.
Why would interest rates essentially be zero in a situation where the MPK is positive and people discount future consumption? Wickselian neutral real interest rates might be forced to zero or negative levels in a balance sheet recession, but in normal times they will be positive. Setting market interest rates below the neutral level inevitably leads to recession.
@James Haughton
Edmund Burmeister analysed conditions under which capital can be aggregated.
On the subject of post Keynesianism, has anyone ever observed reswitching or reverse capital deepening in the real world?
Minimum wage laws drive up the natural rate of unemployment. In normal times where there is no problem creating demand, the increment to demand from the minimum wage will drive unemployment below its (now higher) natural rate, increase inflation, and result in the central bank pushing up interest rates until the unemploment rate rises to above what it was before.
In times like the present in the US and UK where there is a gross deficiency of demand (and zero lower bound on short interest rates), there are lots of ways of increasing demand that do not drag up the natural rate of unemployment, for example quantitative easing and government invesment in transport infrastructure.
@Tim Peterson
From Google – search for:
An Empirical Investigation of Paradoxes (Reswitching and Reverse Capital Deepening) in Capital Theory, Zonghie Han Daejon, South-Korea and Bertram Schefold Fachbereich Wirtschaftswissenschaften Johann Wolfgang Goethe-Universität, Frankfurt, Germany
NB the concept of “natural rate of unemployment” is rejected by some PK economists. The concept of QE as a remedy to unemployment is also rejected as meaningless. The links can be found in Sandpit.
@James Haughton
As I understand NK theory, higher wages simply means higher prices. Lower profits flow from lower real interest rates.
@Tim Peterson
Actually super-profits drive up unemployment even more. Free trade also creates unemployment in fair wage economies. A higher minimum wage increases consumer demand and any increase in unemployment specifically due to min wage hike quickly disappears.
If the price of anything goes up, the demand normally falls. So what. If prices go up for other goods and services then minimum wages need to rise as well. Increases in nominal minimum wages that equals CPI + per capita GNI growth, are perfectly reasonable.
Lower minimum wages leads to a fractured society and rancid debt practices, plus subsequent increased welfare expenditures.
All the issues have been well exposed in the various submissions in National Wage cases, and only rank amateurs would peddle the ill-digested text book notions based on silly partial equilibrium dogmas.
The best way to stimulate an economy would be to double minimum wages and let the market select which capitalists are good for jobs and which are bad for jobs.
@Tim Peterson
I meant PK not NK!
Adam: I have had a glance at the article you mention. It assumes Leontif techniques, while in reality most productive processes in manufacturing are more like stochastic queuing with increasing marginal costs, so it has incorrect models of the wage/profit curve.
@Chris Warren
You just don’t seem to differentiate between equilibrium employment (which is driven down by minimum wage laws) and the demand driven gap between equilibrium employment and actual employment. Why stimulate demand in a way that reduces equilibrium employment. when there are methods of stimulating demand that do not have this effect?
All of the demand stimulation in the world will not push actual employment above equilibrium unemployment in the long run.
I meant to say “equilibrium employment” not “equilibrium unemployment”
@Tim Peterson
Your suggested removal of minimum wage might stimulate employment growth but does not necessarily stimulate demand. In your case the only time when demand rises is when the increase in the economy’s income as an effect of increase in employment + the decrease in economy’s income as an effect of wage reduction as an effect of removal of minimum wage = a positive figure. There is an exception to this however is to reduce the wage level to change the MPC of the bottom quintile to 100% (too low wage hence forcing the lower quintile to not save hence creating extra demands when the money that is available for saving before the changes can now be consumed by another consumer).
However, this temporary increase in demand can not last forever unless the increase in the income level of the lower/middle class comes inline or exceeds inflation after the reduction in wage. As we all know this is impossible and it is exactly what caused America and a lot of the european countries it’s demand problems and asset crashes.
Not sure why you would think minimum wage laws would necessarily reduce employment?
@Tim Peterson
You can find a list of papers showing evidence of the paradoxes on Robert Vienneau’s blog “Empirical Evidence Exists On Sraffa Effects”
The neoclassical dogma of increasing marginal costs has been questioned by Steve Keen who provides a list of references in the following paper available on debtdeflation:
“Deregulator: Judgment Day for microeconomics” Utilities Policy 12 (2004) 109–125
“extensive empirical research has established that the vast majority of firms do not produce under
conditions of diminishing marginal productivity. Instead, the typical modern firm experiences constant
or falling average variable costs (and of course falling average fixed costs): for at least 95% of firms, the ‘‘U-shaped cost curve’’ that dominates economic thinking about costs is false. Instead, firms experience falling average costs of production as output rises, and, after a ‘‘breakeven’’ volume of production is reached, each additional sale adds to profit.”
In regards to reducing the involuntary unemployment rate to zero the proposal of Employer of Last Resort / Job Guarantee put forward by H. MInsky, L.R.Wray, W. Mitchell advocates direct intervention on the job market. It has been already partially implemented (South Africa – EPWP, India – Maharashtra’s Employment Guarantee Scheme). That proposal is based on creation of a buffer stock of workers employed at the minimum wage and is considered to be non-inflationary. It is not primarily intended to stimulate the aggregate demand.
Let me mention that I used to live in a communist country with zero unemployment but that system was obviously not working well. Then after the collapse of the Soviet Bloc the unemployment rate exceeded 16% in 1994. It peaked again at 20% as a result if disinflation policy in 2003 – the year I left.
Watching the people suffering from the results of various economic experiments based on questionable neoclassical economic theories helped me to ditch naive liberal views which I shared with the majority of my colleagues 25 years ago.
There is absolutely no reason to believe that “equilibrium unemployment” in the long run needs to be higher than frictional unemployment. The reason why high unemployment is cultivated in many Western countries is in my opinion purely political. The system does not need to be fine-tuned to provide the best profit-making opportunities to 1% of the population and debt-fuelled mass overconsumption based on the accelerating rate of exhaustion of non-renewable natural resources.
Anyway we may need to move this discussion to Sandpit.
@Tim Peterson
The extra wages creates extra consumption which creates extra employment which shifts both the demand and supply of labour to a new equlibrium at higher wage rates.
If there was unemployment, with better pay, some people will switch from welfare to work – so labour supply will increase. As there is more consumption, businesses will demand more labour – so labour demand increases. A totally new equilibrium occurs, based on changed schedules, and there is no gap.
If adjustments to min wage are small and frequent, this adjustment will be mundane and will ensure that workers equity in society remains reasonably constant. Most minimum wage cases are based on increases in response to price increases already manifested in the economy.
Only capital benefits if workers wages are held back. The rich get richer and the poor get poorer.
@Chris Warren
What you wrote is consistent with Kalecki’s views on changes in employment under conditions of imperfect competition with constant marginal costs up to the level of full capacity utilisation.
Putting the analysis in the modern political context we need to be concerned about the possibility of the capitalists trying to defend the rate of profits by continuously rising prices what would lead to a wage/price spiral as in the 1970s. This is the true meaning of NAIRU – if the workers are not terrorised by a constant threat of losing jobs by holding the unemployment rate at a high (“natural”) level, the capitalists will exercise the monopoly power of some firms to pass on the rising costs and destabilise the whole pricing system of the economy.
The second more serious issue is related to globalisation and international competition. The global capitalist system has been effectively hacked by China. The West will linger in low growth for the next decade or so due to private debt deleveraging and austerity while the Chinese will power ahead (in their case low wages mean high investment out of profits rather than high level of wealth hoarding by the rich).
At some point of time the rising costs of extracting energy and other natural resources will deliver the Western capitalism coup de grace…
@Adam (ak)
Yes, exactly.
But it is a profit/wage spiral.
The essence of the problem, is that capitalists can only maintain super-profits by cutting wages of workers.
If workers defend themselves then capitalists unleash the spiral and screw the entire society.
@Adam (ak)
China current economic strategy won’t last forever as well, it is basically the same idea as the Western Capitalism. The only difference is the Chinese leader is at least not as idiotic as the Western capitalist countries to use debt leverage; but they have failed to use price control when they have the ultimate control over the economy to ensure the well being of their own population. (Well, I guess when it comes to Chinese leaders they are bribed by the big corporates anyway)
Wah, wah, wah. The truth hurts. Williamson is doing a public service.
I’m always amazed at the legions of libertarians who selflessly devote their lives to public service. How jolly nice of them!
@Adam (ak)
Estimating cost curves is tricky for two reasons:
1) firms hoard and dishoard labour and capital over the cycle and
2) productivity shocks effect output in the same direction
both of these effects give a false impression of economies of scale
also, productivity and output have (common) stochastic trends, so a production function regression in levels will be spurious.
The best way to estimate cost curves is to look over the shoulder of operations research folk who set out to minimize them. They do so by simulating the underlying technologies.
The reason that the natural rate of unemployment exceeds frictional unemployment is mostly mismatch between skills supplied and demanded. The minimum wage and wage rigidity in general is another reason. Show me a valid regression that shows that the NAIRYU is 2%!
What’s all this about the minimum wage? Couldn’t a minimum wage increase employment?