Robert Lucas: weasel writer
How Robert Lucas ridiculed the unemployed and defined the concept of unemployment out of existence.
I’m investigating differences between statistical and model definitions of economic variables. While doing this I hit on the article ‘Understanding business cycles‘ by Nobel prize winner Robert Lucas. This article aims to demolish chapter II of Keynes’ General Theory and especially the concept of involuntary unemployment. What a mess. Some points:
A) Lucas starts by embracing the investigations of the business cycle by Mitchell – but conveniently ‘forgets’ to mention that unemployment, a prime interest of Mitchell, was a core element of such investigations.
B) He states about chapter II of the general theory:
“These models are not, however, “equilibrium theories” in Hayek’s sense. Indeed, Keynes chose to begin the General Theory with the declaration (for Chapter II is no more than this) that an equilibrium theory was unattainable: that unemployment was not explainable as a consequence of individual choices and that the failure of wages to move as predicted by the classical theory was to be treated as due to forces beyond the power of economic theory to illuminate. Keynes wrote as though the “involuntary” nature of unemployment were verifiable by direct observation, as though one could somehow look at a market and verify directly whether it is in equilibrium or not.
Where to begin? Every remark of Lucas is wrong. When you read chapter II it turns out that (i) Keynes does explain unemployment as a consequence of the aggregate of individual decisions while (ii) he also states that the movement of wages is not beyond the power of economic theory to illuminate. Also, Keynes gives a pretty precise definition of what he consideres to be involuntary unemployment (this in stark contrast to people like Lucas and comparable economists, approvingly mentioned in the text,like Becker and Sargent, who never bother to discuss the definitionsof their variables) : “Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment. ” (Here, paragraph IV). This is a definition which as I see it enables operationalisation and, after this, measurement. Implicit in the definition are stable nominal wages, the price increase is exogenous. An example is Spain – the definition does enable verification of the situation which means that Lucas is very wrong about this. Another ‘mistake’ of Lucas is the idea that Keynes needed sticky wages to show the possibility of involuntary unemployment. He didn’t and I probably have to state why this is not the case. In General Equilibrium theory as perceived by Lucas and Hayek there is no circular flow of money which means that the decline of spending and the circular flow of money induced by lowering nominal wages is not incorporated in the model. Once you do this flexible wages aggravate the situation.
C. Lucas states that, in the thirties, the Tinbergen models were based upon the ideas of Harberler and not on those of Keynes. Tinbergen himself was indebted to Harberler but also (could not track the quote but I’m sure about this) stated that he was surprised that Keynes was so negative about his models, as Tinbergen had the idea that he was quantifying the ideas of Keynes.
D. Lucas is clearly very unhappy with the idea of involuntary unemployment and explicitly compares ‘unemployment’ with ‘vacations’ and ‘weekends’. Quote, mind that Lucas suddenly and without stating this shifts from the aggregate price level to micro economic prices while first denouncing the existence of wage labor while he’s in the following part of this paragrap talking about wage labor:
“What if, at the opposite extreme, the price change is transitory…? The answer in this case amounts to knowing the rate at which the producer is willing to substitute labor today for labor tomorrow. If “leisure” [Lucas means unemployment, M.K.] is highly substitutable over time, he will work longer on high price days and close early on low price days. … but what we do know indicates that leisure in one period is an excellent substitute for leisure in other, nearby periods [This is about genuine leisure, M.K.]. Systematic evidence at the aggregate level was obtained by Rapping and myself (1970); Ghrz and Becker (1975) reached the same conclusion at a disaggregative level. The small premiums required to induce workers to shift holidays and vacations (take Monday off instead of Saturday, two weeks in March rather than in August) point to the same conclusion…: holidays [this is suddenly about what we call unemployment! M.K.] are known to be transitory .”
A point not debated by Lucas is that though the level of unemployment is often quite sticky the composition of the population of the unemployed is quite variable. Despite large inflows and outflows of unemployed, the level does not change too much. Which means that there is something ‘beyond’ individual choices which pins this level down – like in some cases the level of aggregate spending. As Keynes indicated in his definition (assuming that in his days a higher price level of goods and services could only be attained by an increase in aggregate spending). But in Lucas his weasel world, such flows are irrelevant.