Neoclassical Wage Restraint Madness

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It had to happen: neoclassical economists are now advising that the anticipated recession will be much milder if only workers would accept wage cuts.

When I saw this crisis was imminent in December 2005, one major factor that motivated me to go public with my analysis was the certainty that, when the crisis hit, neoclassical economists would either blame it on wages being too high (”the abolition of Work Choices caused the Depression!”), or would suggest that wages should be cut to reduce the imbalance between the supply of and demand for labour.

The crisis hit too early, and was far too global, for the abolition of Work Choices to “cop it sweet”. But yesterday, in an OpEd in the Sydney Morning Herald, Mark Davis reported that “Economic modellers” had concluded that 1% cut in the rate of growth of wages will boost employment growth by half a percent:

Economic modellers reckon cutting aggregate wages growth by a percentage point boosts employment growth by half a percentage point. Some think it boosts employment more. In the current environment that could save more than 50,000 jobs.

Let’s extrapolate a bit here: given the standard increases in productivity and population, employment growth of about 2.5 percent is needed to keep the unemployment rate constant. So “economic modellers” (i.e. neoclassical economists) reckon that a 5 percent cut in the rate of wages growth would translate into a 2.5 percent boost to the rate of growth of employment.

Since those same modellers are also anticipating growth slowing to about zero (but not negative of course–that would mean a recession, and as we all know, Australia is special and won’t suffer one), all we need to do to make sure Australia lucks out with both no recession AND no rise in unemployment is to … cut wages by one percent (since the current rate of growth of wages is close to 4 percent).

Nonsense. This is standard neoclassical economic thinking that if one lowers the price for a product (in this case, labour), more of it will be demanded. This thinking has some relevance when the market in question is that for, say, apples (though the basic “supply and demand” mathematics is false). But when the market you are talking about is Labour, even in the absence of debt, the thinking is only half baked.

In an indirect way, the income that apple producers earn from selling apples is a component of the demand for apples–but the scale of that demand is trivial. Equally, in an indirect way, the income that workers earn from selling their labour is a component of the demand for labour–and here the scale of that demand is no longer trivial.

Reducing real wages–and thus reducing the capacity of workers to purchase output–may boost profits in real terms by skewing the distribution of real income further in favour of capital. But it will undoubtedly impact on some capitalists badly–not makers of sports cars perhaps, but certainly those who run supermarket chains–and the aggregate effect is a toss-up.

But as Keynes argued in the General Theory, a cut in money wages is highly unlikely to affect real wages in the same direction. Since labour is an input to the production of literally everything, a general cut in money wages is likely to lead to a general fall in prices as well. Again, whether wages will fall more or less than prices becomes a toss-up.

Here Keynes made one of the few acknowledgements of what I regard as the real cause of the Great Depression–the unwinding of the debt bubble built up during the speculative mania of the 1920s (an issue that Irving Fisher was far better on with his Debt Deflation Theory of Great Depressions). Since Keynes accepted the neoclassical notion about real wages and the demand for labour, he agreed with his conservative opponents that real wages had to be cut to increase employment. But he said there were two ways to attempt achieve this–directly by cutting money wages, or indirectly by causing inflation.

The former, he argued, would largely lead to further deflation, which “increases proportionately the burden of debt; whereas the method of producing the same result by increasing the quantity of money … has the opposite effect. Having regard to the excessive burden of many types of debt, it can only be an inexperienced person who would prefer the former.”

An “inexperienced person” indeed. Keynes used several epithets to refer to his intellectual opponents in this section of the General Theory: “unjust person”, “foolish person”, “inexperienced person”. In every case, he meant the neoclassical economists of his day. Now their great-grandchildren are repeating the same foolish, inexperienced and unjust mantras today.

My letter critiquing this neoclassical nonsense was published in today’s Sydney Morning Herald (January 3rd 2009):

Giving our pay packets a shave would cost jobs

January 3, 2009

Mark Davis’s suggestion that wage restraint would reduce the rise in unemployment this year is nonsense (“Give your pay packet a shave and help save jobs“, January 2).

Unemployment will rise in 2009 not because workers were paid too much in 2008 (or earlier), but because households and businesses took on too much debt during a speculative bubble that has now burst. In the aftermath, sane people attempt to reduce their debt but that means a reduction in spending, which causes unemployment to rise.

To reduce that rise in unemployment, you have to tackle the root cause by making it easier to repay debt. Reducing wages – even cutting the rate of growth of wages – will make that harder, not easier, especially since many of those who are trapped by debt are workers.

That Davis’s argument is supported by economic modellers confirms that the case is poorly thought out. These modellers completely failed to anticipate the global financial crisis because their neoclassical models ignored the role of debt.

John Maynard Keynes discussed similarly naive thinking during the Great Depression. Though he agreed that real wages should fall, he said there were two avenues to achieving it: causing inflation, or reducing wages.

Keynes argued that a fall in money wages would simply cause prices to fall further, adding to the deflation that made the Depression so intractable.

He concluded that given the excessive burden of debt and the fact that falling prices would make debt even harder to repay, “it can only be a foolish person who would prefer a flexible wage policy to a flexible money policy”.


About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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22 Responses to Neoclassical Wage Restraint Madness

  1. tommyt says:

    Thank you Steve for your comments on “wages”.

    I was waiting for the inevitable to happen i.e. the political response to the ‘recession they didn’t see’ appears to be “cut wages” so we can relieve unemployment! It reminds me of the fraser years and the “razor gangs”! It was then the ‘mantra’ of the day! I guess from your analysis steve, I can understand why!Now we will do it all again I suspect and some political parties will be preaching it very soon to your t.v. screen in 2009! just watch and see as the unemployment figures climb again,
    the ‘pollie’ will look seriously into the camera and declare to all of us innocents ” If we in this country are to get back to a lower unemployment rate, we must look at lowering our wages costs, employers will employ more if the cost of that labour is lower and we can get the economy moving again..” Just wait fellow bloggers, be afraid, be very afraid, it is coming!!

  2. clive says:

    Excellent Steve. If anything should be cut, it’s the price of some of the commodities connected with the building industry they have been spiralling out of control since the bubble began. We have been told time and time again that prices for steel (iron ore) copper etc. were just going through the roof we have been forced to continually pay rises on those products with increases nearly every month. Well the price of copper, iron ore, zinc etc. have fallen through the floor….lets see some downward spiralling from manufacturers – miners or is it just a one way thing … business makes the profits the community at large pays the losses. Their products are not priced on scarcity they a priced on what the market can stand….just plain old exploitation. They have made their big killing so now they want the workers to take on their losses.

    ‘In 2005 alone, the price of copper rose almost A$2000 per tonne
    against the sell price of the copper based products
    over the course of the year.’

  3. BrightSpark1 says:

    Hello Steve Happy New Year

    You are too kind to these neo-classical people. Your statement “That Davis’s argument is supported by economic modellers confirms that the case is poorly thought out”, could have been far more caustic by adding “and their models lack mathematical method and rigor”.

    As you have always said these people lack sufficient mathematical knowledge to create such “models”. Worst of all they continue to kid themselves and the MSM.

    I think we should call neo-classical economics ESP “Economics in the Sand Pit”.

    Please keep up the good work.


  4. Bullturnedbear says:

    Hi Steve and all. Happy new year.

    Wages nominal and real will fall over the next few years. I agree it won’t increase employment. Wages will fall because unemployment will rise. As unemployment rises, workers will be willing to accept less and employers will know that workers are desperate and offer them less. Pricing is always set by demand.

  5. al49er says:

    In a previous post I endeavoured to highlight one of my points in relation to viewing the Global Financial Crisis from a ‘sociological perspective’, by asking “when was the last time you met a clerk?”

    Most people posting to this site (very much self included) are great admirers of Steve and his work, especially the way in which he can make complex concepts comprehensible to the average ‘bloke/sheila’ and the fact that he foresaw this crisis, as far back as December 2006 and has been laying out it’s progress in chapter and verse since that time. And now we await the development and presentation of his solutions and models e.g. the current ‘pure credit economy’ model for stable world monetary systems and economies.

    Notwithstanding, I am becoming more and more convinced that it is not possible, or perhaps ‘sufficient’ is a better word,
    to develop or proffer economic and financial systems to underpin the orderly operation and conduct of world economies, commerce and trade (and thereby social development) without accompanying notes on the relevant sociological reactions, attitudes and ramifications.

    My particular point in saying this is, that one of the earliest indicators that gave rise to my questioning ‘what was happening’ in the world economic and financial systems, was the term “futures trading”.
    Like most of the functions and terminologies, I’m still not fully familiar, but getting a better insight as things come ‘tumbling down’. But it just seemed to me that ‘futures trading’ had more in common with gambling than it did, productive commerce.

    Then gradually over 20 to 25 years (I don’t know the timeframe could be shorter or longer) it just appeared to me that “the nature of work was changing”.
    Now of course part of that was obvious and reasonable, to the extent that technology has assisted making things simpler and more efficient and effective and requiring less ‘pure manpower’. Like the digging of a hole, unloading cargo ship, posting accounts etc etc. (make your own list)

    At the same time however, it also occurred to me that this period coincided with a very important change in people’s views and conduct, in particular how they came to regard the ‘pursuit of work’ and their expectations in respect to all associated elements (performance, responsibilities, promotion etc), and probably remuneration above all.

    It used to be of course that one got a position (through prior learning, advanced study or apprenticeship for example), hopefully in a chosen or desired field, then initially set about establishing themselves in the role, the organisation, the working environment and amongst their peers. Then there was a period of ‘ of those particular duties and responsibilities (and that’s how things were seen ‘duties & responsibilities’ etc)performance’and even ‘commitment to the company’.
    Then over time, based on their performance or regrettably their connections, favouritism or whole range of other criteria, they progressed, working their way “up the ladder” in that workplace, organisation or field, or even shifting to another field, requiring their improved skills, knowledge and abilities.

    Gradually however in my observation all of this began to change; the attitudes, expectations, practices, and the social and moral compass.
    People weren’t going to wait a lifetime to have what they saw as “there needs and expectations and indeed dues” fulfilled.

    Suddenly we heard descriptors like “the upwardly mobile”, “people going places in a hurry”, “the winners” (who were no longer individuals fulfilling the first second and third places in the foot race).

    This is when the ‘clerks’ began to disappear and we got ‘administration managers’, ‘account directors’; the ‘personnel manager’ gradually became the director of ‘human resources’.

    It might be easier to describe the senior positions of local council where I live. No ‘departmental managers’ here; we have the Chief Executive then the following positions all with the word ‘Director’ before them.
    The Director ‘Organisation Support’,
    ‘City Strategy’, ‘Planning & Development’ (half understandable that one !),
    ‘Community well-being’,
    ‘Presentation & Assets’, and the doozy of them all, “The Director of City Futures”.

    You get my drift and no doubt have myriad classic examples of your own.

    And of course titles like that warranted an appropriate ‘salary’. No! ‘ remuneration package’ car, credit card, phone etc etc and of course when you’re finished doing the job you have been paid to do, there still needed to be the annual ‘bonus’.

    So what do you think happens in the ‘general’ upper management and ‘Executive’ world.
    The whole thing goes crazy that’s what. The ultimate outcome being that you get people like “xxxxxxxx” (fill in the names of your own examples) paid millions of dollars to joined the company, take it to new heights, then to actually stuff it up and get paid extra ‘separation’ millions when you leave.

    And where do we find the ‘champions of all champions’ in this ‘new found order of things’ – in the finance and money markets of course – isn’t that what it is all about? ‘finance & money’ and “me”.

    I mean really, it’s not very hard from here to ‘fill in the dots’ and get to a position where it becomes much easier to understand schemes like ‘ Sub Prime Loans’,
    ‘Hedge Funds’, ‘Derivatives’, not to mention the currency markets themselves and your real rippers like the ‘Ponzi Schemes’ and of course my favourite “Collateralised Debt Obligations” (I love that one !), etc etc etc (fill out your own list).

    Just think for a while about all the people (and we’re not talking ‘clerks’ here) who have created and flogged this crap – false equity, “ghost assets” – estimated at US dollars 10,000 billion.

    Now, picture that figure again for just a little while, then realise that it HAS NOT YET ‘come home to roost’ or more appropriately “hit the fan”, along with the foreign exchange crisis, unemployment and the resultant worldwide social crisis that will follow in its wake.

    Just to try and wrap up my point
    (question Steve), and appreciating that it’s not kosher to occupy too much space in any one individual’s postings on this site;
    finding a new workable economic financial model(s), which is part of Steve’s quest for the holy Grail, I suggest is only HALF the problem, and probably the minor half at that.

    It was sociological change that got us here (via the creation of new models and schemes) and I would put, that without this more difficult to achieve ‘sociological change’,
    it is IMPOSSIBLE to produce a successful, workable/equitable financial and economic model.
    Or do you think it is “chicken & egg”?

  6. wisty says:

    So the monetary cause of the Great Depression was debt, and deflation (i.e. wage cuts) will make this worse. I guess the other side of the coin of debt is the excess capacity and lack of internal demand in the developing world. Would a push towards greater equality be the only way out of our current situation? And what structural elements have caused this lack of internal demand in the developing world, and who can remove those obstacles?

  7. Bullturnedbear says:

    Hi Al49er,

    At the beginning of 2008 I heard a term that was new to me. Old to many though. Socionomics is the study of psychology and how social mood leads the economy and not follows. Eg, The mainstream belief is that the media releases news and the markets follow. Or the RBA changes interest rates and the market reacts. The Socionomists argue that the market (herd) psychology is what causes the change in interest rates or the media in the first place. To explain this you need to see that the RBA is endogenous and a part of the same herd. The herd gets too bullish/positive, so people invest, spend, borrow and the money supply expands too fast. This is seen in the economy as price inflation, so the RBA raises rates to slow inflation. Therefore the herd change caused the RBA to Act.

    I believe this ties in with your argument Al. The social mood changed dramatically in a short period of time. Everyone couldn’t wait. Many thought they could get rich overnight. most borrowed heavily to achieve their goals. The socionomist say that this was the outworking of an extreme (in a historical sense) in positive herd sentiment. The result of this extreme bullishness was the asset and debt mania of the last 35 years.

    The socionomists then go on to say that historically after times of extreme bullishness the herd must correct their behaviour and the herd becomes extremely bearish. This will cause a massive change in social behaviour where people will reject debt and embrace fear and risk aversion.

    Obviously there is so much more to it.

  8. Steve Keen says:

    Hi al49er,

    Minsky’s “Financial Instability Hypothesis” is a theory about people’s behaviour changing over time in response to initially stable economic conditions. Putting that in mathematical form in a simulation is rather more difficult, but in essence that’s what I have done in my own models of his hypothesis.

    There are ways in which modelling behaviour will always be beyond the ken, but the essence of “stability is destabilising” can be captured.

  9. Steve Keen says:

    Hi Bullturnedbear,

    Again, the socioeconomics crowd is familiar to me. I have published in their journal (The Journal of Socioeconomics), though only a commentary rather than an academic paper. They are still struggling to express their views in coherent ways, but they with the behavioural economics crowd in general will play a role in the reshaping of economic theory after this neoclassical debacle.

  10. clive says:

    The number one driver is GREED. Is it right to escalate the price of prawns in your own country because another has new found wealth and is prepared to pay anything to get them…sending the species to continually lower levels. Is it right to escalate the price of export commodities to such an extent that manufacturing in your own country is non existent because the other country has such a lowly paid work force they are prepared to be ripped off for the commodities in order to flood the world with cheap products you can’t compete with. Does this serve your country in the long run. If a cyclone occurs in your community and the price to paint a house was $10000 and now escalates to $60000 is that supply and demand or greed. This is more than supply and demand it’s profiteering. Some where along the way we all pay for it in the end. In increased insurance premiums, depleted resources, and a morally bankrupt population.
    We’ve headed down the US route “it’s all about the $”.
    Here’s one more term for ‘Al49er’ “Education Industry” I thought Henry Parkes told us it was a ‘right’.

  11. clive says:

    Hello Steve, On the topic of models, NPR US has this Article about… ‘Bernanke’s 1980s Computer Model Predicts Crisis’ Called the ‘financial accelerator’.

    It would appear the model was missing ‘The Minsky Moment’ otherwise we may have avoided this mess.

    This is a good line…
    ‘In other words, the model considers exactly what’s happening now, as financial institutions fold or run for shelter in larger firms. Modeling is necessarily an unexact science. “Ultimately, we would like to make precise predictions,” Gertler says. “Yes, we know the economy will get into trouble, or can get into trouble under these forces. But we’d like to say how much.”

    Does the model say the economy is heading for doomsday, unless there’s an intervention? Gertler pauses, then says, “Uh, roughly speaking, yes.” ‘

  12. plp15 says:

    Happy New Year, Steve & Bloggers,

    Thanks for the stuff on Ponzi Math – haven’t absorbed it all yet.

    The scariest thing about Davis’s SMH article is that it demonstrates the limited comprehension of people in positions of influence. In normal times, we can stutter along with muddle-headed leadership. At times like this, the down-side risks are just too great.

    I am with Brighspark1 on this one, Steve – you were far too kind.

    The world economy is on a very slippery slope. The pundits say they are close to having things under control, with massive forthcoming fiscal stimulation packages, etc. But a quick look at the way this has evolved is instructive: Willem Buiter wrote, in December 2007”
    “While a slowdown is unavoidable – and, in the case of the United States, necessary and desirable for the restoration of external balance – a recession is not.”
    Yet in a March 2008 paper, he wrote:
    “Economic prospects for the United States are poor, but nowhere near as bad as the growing crescendo of the moans emitted by the losers in the inside asset revaluation game would have us believe.”
    It seems that things were a lot worse than Mr. Buiter thought, in both December and March. No disrespect for Mr. Buiter – I still read his stuff. But it illustrates how seriously things have been mis-judged.

    Keynes was smart enough to see the feedback loops in economies. From a superficial perspective, the economy has positive feedback loops. Engineers know that negative feedback loops are potentially stable, and positive feedback loops are inherently unstable. That implies that the Economy need GOOD management.

    To my simple mind, Australia faces a huge risk due to our overpriced housing. There is a housing shortage, which has kept us out of USA-like trouble for now. But if unemployment grows to the point where a significant number of mortgagors cannot meet their commitments, we will be in for the same wipeout as the USA – foreclosures, forcing housing prices down, reduced demand, increased unemplyment, more foreclosures, etc.. This risk is so high in the current climate that it scares the hell out of me to think that our “Leaders” may be insensitive to it. So, uninformed meddling with employment is the last thing we want.

    Steve, you may well couch that argument in much more esoteric terms, but please let me know if I am barking up the wrong tree.

    The question I would like to put to everyone is, how do we ensure that our “Leaders” at the helm do not turn us broadside to the approaching tsunami, and stuff up everything? Sorry, I don’t see Hope and Prayer as an effective solution.

  13. al49er says:

    hi ‘bullturnedbear’, the first part of your post did tie in with my argument as did ‘clive’s’proposition that it is GREED.

    But of course it is much much deeper and complex than all of this and I was very interested Steve/’bullturnedbear’to look up the Journal of Socioeconomics. The very scientific level of the papers published together with the required subscription to access them, prevented me going any further, but it is nice to see from my perspective that
    there is a ‘formal branch’ that considers the attitudes and actions of people from sociological standpoint in the consideration of the modelling of economics.

    ‘Bullturnedbear’ you also connected to central tenant of my point in saying “The social mood changed dramatically in a short period of time”.

    It is this ‘change’ in my mind that will be central to any return to a rational and reasonably structured monetary and economic system, not just the model that manages to ‘win the day’.

    For those of you who get the ‘Weekend Australian’ there is a very good article in the Inquirer section on page 17 titled “Return to Self-reliance”.
    Essentially it is a synopsis of an Australian based British ‘futurist’ who was “persuaded to make 10 convictions for 2009”. Now whilst I’m not always that enamoured of some of these sorcerers who’ve found the beautiful niche and income for themselves by making ‘considered predictions’ ostensibly to help the businesses that employ them, I found some of the propositions that he was putting were very much in line with my own thinking and predictions i.e. that individuals, communities and nation’s thinking and actions were going to need to change markedly before we get back to any form of “stability”.

    For some years I have put the proposition that each generation changes in a certain way and level from its predecessor, but that in the last couple there has been a quantum leap, to the extent that we have, to a very substantial degree, lost many of the qualities of character that existed with our forebears.

    If we do as many believe, suffer a world ‘Depression’ I don’t think that as a people we will handle it anywhere near as well
    as they did in the 1930s, and beyond.

    The term ‘discipline’ has virtually been banished from our lexicon with specific exceptions when ‘celebrating’ sports stars !
    (heroes -gee the use of that term makes me sick), and commenting on what a disciplined training regime they have.

    “yeah well, it’s all right for those sort of people to be disciplined, but I shouldn’t have to be told ‘how to’ or be ‘expected’ to behave, control my borrowing, spending, expectations, eating habits, exercising, other healthcare etc etc, like we don’t discipline our children anymore do we, that was stopped a long time ago”. ! ! !

    So if you get the chance and the reference above, I found it to be a good read and fair indicator of sorts of changes we’re going to need to make from a sociological point of view in order to address this “global financial crisis”.

    Oh and ‘clive ‘ you might need to expand a little more on the new term you had for me
    “education industry”. Whilst I am married to a teacher ( a good one!) I still didn’t quite get the full thrust of your angle.

  14. BrightSpark1 says:


    That article on the NPR website quoted by clive. Do you know if Bernanke has published details of this model? I had an LOL experience, talk about hubris! How about the claim that the model is applicable to the current crisis!

    From the picture of the “math” it only seems to include some simple algebra with gamma and sigma functions, no calculus, no DEs, no transfer functions, and no Laplace transforms.

    When is everybody going to wake up? When are they going to realise that they are talking to the wrong people?

  15. Steve Keen says:

    Hi Brightspark,

    I’m downloading the Bernanke papers right now. The first one was “A general equilibrium model of banking”, which should give you some idea of what to expect.

    Technically it started as a difference equation model in which they consider the conditions under which equilibrium applies, and it includes discounting of future expected income flows so there are some infinite sums there too. In later versions it became an integral model–again driven by the working out of conditions under which equilibrium would apply.

    A suggestion for you: I would love to see an engineer take apart the maths that economists use in the GE models. Would you like to have the papers forwarded for a bit of forensic mathematics?

  16. nicko says:

    I’m not sure I fully grasp the concepts in this article & their consequences.

    Intuitively I’d say wage cuts would increase employment in an individual case. I imagine what would happen if I lost my job (a real possibility right now) then had trouble getting an equivalent or better (paying) one in the current climate. What would I do?

    I imagine that in the very worst case (akin to the 1930’s depression) I could take odd jobs for ~$3 an hour(in contravention of minimum wage policy). Work a 60 hour week this adds up to $180 (about the same as the dole – I’m too proud to take it). This would be enough to house & feed me (I don’t have a family to support).

    I also imagine that there would be just about unlimited demand for labour in Australia at these rates, especially if the work force was prepared to move to areas of higher employment.

    Given this extreme case(with all of its assumptions) how can it be possible that wage cuts (in this case a 90% wage cut) ultimately wouldn’t increase employment?

    I do understand the role of debt in this current crisis (debt wasn’t included as an assumption in my extreme case). Let’s say I had a decent amount of debt to service and a family to support. Clearly I couldn’t do it on $3 an hour no matter how many hours I worked. I’d either have to default on my debt or allow the government to inflate it (and my wage) away. This then raises a number of questions:

    * Isn’t monetary inflation & speculation what caused these issues in the first place?
    * Doesn’t inflation always lead to speculation in favour of productive activity?
    * Do we not have abundant examples of the perils of inflation (eg Zimbabwe) ?
    * If people know that debts get inflated away at the first sign of trouble there is no incentive to be responsible with debt. There is also no incentive to save. In a sense saving becomes speculating to preserve the buying power of your savings.

    * Does not all of this come down to what is ultimately a philosphical argument, namely which is the lesser evil: deflation or inflation?

  17. Bullturnedbear says:

    Hi Nicko,

    You missed what Mark Davis was proposing. He was proposing a 1% wage cut (not 90%) for all employed workers. That, based on his theory would create a further 50,000 jobs. BULL!!!

    As Steve pointed out. In a climate of falling demand, (which means people spend less and save more) a drop in wages would lead to a further fall in spending and therefore reduce profits of employers and probably lead to higher unemployment (not grow employment as suggested).

    What you were discussing was once you had lost a job you would be happy to work for less money to get a new one. I agree. I would too.

    Interestingly, if real wages fell by 90% in Australia, most if not all businesses would fail. Unemployment would trend to massive levels as consumption would crash dramatically. People would only be surviving on government handouts. That would be an unimaginably extreme depression.

    This is because businesses build stock levels, manufacturers build capacity and service businesses build capacity all to meet an expected demand for their products and services. If that demand crashes dramatically, those businesses can become insolvent overnight. Banks would fail because nobody could repay their loans. Depositors would lose all their savings as the banks failed. Leaving no money left in the system. The price of goods then crash because nobody has money to pay for anything. This is what happened in the Great Depression. Only wages fell by 20 to 30% that time. I think.

    There is no doubt that inflation is by far the lesser of two evils. The question I would like answered is “How on earth can we avoid deflation this time?”. Helicopter Ben or Glenn Stevens have no hope of stopping the downward spirals in employment and demand that have already begun.

  18. iconoclast says:

    Greetings all. Happy new year!

    As has been stated by others on this blog, Steve you have been far far to lenient with these clowns.

    The fundamental problem with these people is that they do not ‘infer’ well; that is, as a class, they lack critical thinking skills, logic! Simply, they fail to execute simply syllogisms.

    There should be a prerequisite in their educational curriculum that, at least, provides them with an introduction to logical thinking!

  19. Steve Keen says:

    Dear Iconoclast,

    Believe me that I am far from lenient with neoclassical economists in my academic and other critiques. There is a limit however in what one can get published in a letter to the editor of a major newspaper! So my language in this post was mild, but my opinion of neoclassical theory continues to be derisory.

  20. BrightSpark1 says:

    Helo Steve
    Yes I would like to see the details of this Bernanke “model” and have ago at taking it apart. I have for some time been very skeptical of this neo-classical methodology and your book is the only contemporary book on economics that I have respect for.

    I have found all other contemporary books that I have seen wonting in detail and based on false premises. You take these false premises apart in “Debunking Economics”, this is very refreshing. I would enjoy examining this neo-classical application of mathematics from an engineer’s perspective.

  21. Steve Keen says:

    I look forward to your evaluations Brightspark, and as I noted when I sent you the files, I’ll post your commentary here. It should make for an interesting read!

  22. Deflationist says:

    The only solution to this mess is the complete elimination of debt, and the massive redistribution of the accumulated wealth of the “elite”. Good luck with that. The debts will be wiped out, but what is to restart the engine of production? Not the “working people”, as so many of them will be trying to survive on the scraps. We are in for a world of pain….litterally and figuratively!!

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