Home > Uncategorized > Keynesian explanation of unemployment: seriously Incomplete

Keynesian explanation of unemployment: seriously Incomplete

from Asad Zaman

This post is Lecture 8B — from 17m to 37m of video lecture linked at bottom of post. It attempts to make sense of the Keynesian explanation of unemployment based on insufficient aggregate demand. It concludes that several elements missing from Keynes must be added to get to a satisfactory explanation.

 Friedman’s Methodology  leads to crazy models: In previous post (  Lecture 8A – Microfoundations for Keynesian Economics ), we showed that even small differences in the micro-foundations could lead to very large differences in the macro outcomes. Depending on how we choose micro-foundations, we can get almost any result we like at the macro level. So the question arises: HOW should we construct our micro-foundations? How can we choose among the wide variety of possible micro-structures. This leads to a very serious methodological issue of what models are and how they relate to reality. On this topic, see my detailed discussion in post on “Models and Reality“. Briefly, the standard POV adopted in neoclassical textbooks is that the only job of models is the provide a match to observations. The inner details of the models can be arbitrary.  However neoclassical economists insist that a good model must have optimizing behavior by all agents, and the equilibrium outcome of the model should match observations. There is no requirement for models to be realistic.   read more

  1. Frank Salter
    November 24, 2018 at 11:58 am

    I am in total agreement that the Keynesian explanation of unemployment is seriously incomplete.

    Clearly, the lack of demand arises from the low returns to labour. As the economic cycle must be seen as the major contributor to the changing levels of employment, it is necessary to have a quantitative analysis of these cycles. This can only be achieved by solving the appropriate differential equations. Algebraic equations will not suffice. The solution is then most likely to be achieved through numerical procedures. It will be by finding solutions in historical/physical time.

    That models do not have to be realistic, appears to be a claim from those unable to formulate appropriate models. This usually comes down to the fitting of equations to empirical data — a completely valid procedure. Then by not properly understanding the oft repeated phrase, “correlation does not imply causation”, they conflate the concrete (curve fitting) with the abstract theoretical relationships. They are apparently arguing by analogy, without understanding that it necessary to prove that the analogy is true before using it to demonstrate other analogous properties. Their false logic is that:
    the concrete relationship represents empirical data validly and that it can be an arbitrary equation’;
    by the false analogy leading to the invalid belief that the abstract relationship can also be an arbitrary equation;
    and finally, that the model need not be realistic. Only that it matches the empirical evidence, which of course is impossible.

  2. December 2, 2018 at 7:26 am

    “In April, 1818, less than fifteen months after the Bank of the United States started, it was believed to be insolvent. A committee, appointed by Congress to investigate its affairs, reported a resolution requiring the bank to show cause why its charter should not be forfeited, but the resolution was lost, forty members of Congress being stockholders in the bank. The bank now resorted to vigorous measures to save itself from bankruptcy, and in a little over two months was once more solvent. It had, however, ruined the country. The amount of bank note circulation in 1813-14 was about $45,000,000; in 1817-18, $100,000,000; and in 1819 about $45,000,000. Contraction had done its work, and the ruin which it had accomplished was deep.” – William Agustus Berkey, The Money Question, 1878. “Thirty trades which employed 9,672 persons in 1816, at Philadelphia, employed only 2,137 in 1819. Trades which employed 1,960 persons at Pittsburgh, in 1815, employed only 672 in 1819. The papers were filled with advertisements of sheriff’s sales. … Land in Pennsylvania was worth on the average, in 1809, $38 per acre; in 1815, $150; in 1819, $35.” – William G. Sumner, A History of American Currency, 1876. Although many people suffered during this depression, this was not a vile act of evil. By that, I mean it doesn’t seem to have been an intentional, coordinated currency contraction by the central bank – It seems to be just the way things worked out. The Bank was stuck. It had to recall loans and could not create more bank note currency because it simply lacked the necessary gold reserves for redemption. The episode, once again, demonstrates the destructive power of a contracting money supply. Unfortunately, the one thing that never declines, no matter how bad the economy gets, is a person’s debt. A dollar owed in good times is a dollar owed in bad. It doesn’t matter to the banker that a farmer, who got a dollar per bushel of corn during the boom, now had to sell 3 bushels to earn that same dollar during the bust. Farmers who had no trouble paying their mortgage when commodity prices were high, now struggled and failed as crop prices plummeted. Workers in the cities lucky enough to have a job had their wages cut by more than half and a new term was added to the American lexicon: “Unemployment.”

    Unemployment is created in actual historical situations. Not in the theories of classroom and textbook economists. Besides, in the hands of economists the theories almost never cite or agree with the historical experience of unemployment. How the hell can economists help solve a problem they can’t describe and don’t know? My advice to economists – do some damn field work, both historical and current so they know the problem before they assure everyone they understand and can solve it.

  3. Hepion
    December 5, 2018 at 1:09 pm

    Economist are obsessed with money. Monetary aggregates, monetary flows.

    Unfortunately, understanding economy requires explanation that takes in to account all money-denominated assets, and developments in them. Case in point is great recession, that started when households lost trillions in housing wealth.

    We have tree registers where we keep record of our legally owned assets – land registry, money registry, and stock market.

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