Neoclassical Wage Restraint Madness

flattr this!

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”.

Indeed.

About Steve Keen

I am a professional economist 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 debts accumulated in Australia, and our very low rate of inflation.
Bookmark the permalink.

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.’

    http://www.neca.asn.au/filelibrary/VIC/The_Price_of_Copper.pdf

  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.

    Cheers

  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.” ’

    http://www.npr.org/templates/story/story.php?storyId=95076198

  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:

    Steve

    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!!

Leave a Reply