Debunking NAIRU
from Lars Syll
In our extended NAIRU model, labor productivity growth is included in the wage bargaining process … The logical consequence of this broadening of the theoretical canvas has been that the NAIRU becomes endogenous itself and ceases to be an attractor — Milton Friedman’s natural, stable and timeless equilibrium point from which the system cannot permanently deviate. In our model, a deviation from the initial equilibrium affects not only wages and prices (keeping the rest of the system unchanged) but also demand, technology, workers’ motivation, and work intensity; as a result, productivity growth and ultimately equilibrium unemployment will change. There is in other words, nothing natural or inescapable about equilibrium unemployment, as is Friedman’s presumption, following Wicksell; rather, the NAIRU is a social construct, fluctuating in response to fiscal and monetary policies and labor market interventions. Its ephemeral (rather than structural) nature may explain why the best economists working on the NAIRU have persistently failed to agree on how high the NAIRU actually is and how to estimate it.
Many politicians and economists subscribe to the NAIRU story and its policy implication that attempts to promote full employment is doomed to fail since governments and central banks can’t push unemployment below the critical NAIRU threshold without causing harmful runaway inflation.
Although this may sound convincing, it’s totally wrong!
One of the main problems with NAIRU is that it essentially is a timeless long-run equilibrium attractor to which actual unemployment (allegedly) has to adjust. But if that equilibrium is itself changing — and in ways that depend on the process of getting to the equilibrium — well, then we can’t really be sure what that equilibrium will be without contextualizing unemployment in real historical time. And when we do, we will — as highlighted by Storm and Naastepad — see how seriously wrong we go if we omit demand from the analysis. Demand policy has long-run effects and matters also for structural unemployment — and governments and central banks can’t just look the other way and legitimize their passivity reunemployment by referring to NAIRU.
The existence of long-run equilibrium is a very handy modelling assumption to use. But that does not make it easily applicable to real-world economies. Why? Because it is basically a timeless concept utterly incompatible with real historical events. In the real world, it is the second law of thermodynamics and historical — not logical — time that rules.
This importantly means that long-run equilibrium is an awfully bad guide for macroeconomic policies. In a world full of genuine uncertainty, multiple equilibria, asymmetric information and market failures, the long run equilibrium is simply a non-existent unicorn.
NAIRU does not hold water simply because it does not exist — and to base economic policies on such a weak theoretical and empirical construct is nothing short of writing out a prescription for self-inflicted economic havoc.
NAIRU is a useless concept, and the sooner we bury it, the better.
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Real-World Economics Review Blog 
OECD average unemployment 1953-1974 was 3.2%. Inflation 1960-1974 was 4.5%, not an outrageous level. GDP growth was 4.9%.
For Australia: unemployment 1.3%, inflation 3.3%, GDP growth 5.2%.
Evidently these figures are impossible.
NAIRU is a flagrant fudge. Never mind all the theorising. Are economists wilfully blind to recent history, or just profoundly ignorant?
I agree the NAIRU is a useless concept… except for the rich who can make higher profits in a low commodity inflation, high asset inflation, high unemployment economy. Hence the rich have engineered exactly this kind of economics in late stage neoliberal capitalism. It was no accident. It was deliberately engineered by a planned neoliberal agenda, clearly laid out in the Omega Plan developed by certain Adam Smith Society luminaries and handed to Margaret Thatcher when she first won government. A part of this plan and like neoliberal blueprints from the Chicago School was to restructure a broader socioeconomic reality into a stricter market fundamentalism frame and strip the coordinating state down to a reduced size with lessened financial and instrumentality power relative to corporations and oligarchs. Alternatives were often rendered inconceivable in the minds of the general public and un-executable in adminstrative terms. It was the rise of TINA (There Is No Alternative).
In Australia, neoliberalism was called economic rationalism. The general program of cost cutting and privatization was termed rationalisation. Micheal Pusey wrote an excellent book called “Economic Rationalism in Canberra”. It’s worth reading for some historical perspective and a sociological view of how the dogmatic storm troopers of rationalism were recruited, trained and unleashed on public administration to change it, if not for ever, at least for a generation and more.
Pusey has recently published a paper entitled “Economic rationalism in Canberra 25 years on?” – Michael Pusey, Sage Journal of Sociology.
The abstract states;
“This article, based on an edited transcript of a speech at The Australian Sociological Association (TASA) conference in Melbourne in December 2016, summarises the criticisms of ‘economic rationalism’, cum neoliberalism, that emerged from the ‘economic rationalism debate’ in Australia of the early 1990s to the present. Economic rationalism reversed Australia’s historic nation-building legacy. Free market neoliberal doctrines have captured the central Canberra policy-making apparatus and radically reduced the coordinating role of the state in most areas of public policy. Economic ‘reform’ is seen primarily as a political project led by international and domestic corporate interest groupings and aimed at the transformation of Australia’s institutions. The neoliberal orthodoxy continues to distort the policy process as it has become functionally indispensable for the process of policy making and government, despite its failing intellectual legitimacy.” – Michael Pusey.
And for those who enjoy cartoons, here is a link to one:
https://www.thenation.com/article/one-rich-guy-who-owns-everything/
Sorry, it might not like your ad-blocker. The one rich guy who owns everything apparently does not like ad-blockers. ;)
I have found another link for the Micheal Pusey paper.
https://www.whitlam.org/publications/2017/7/12/economic-rationalism-in-canberra-twenty-five-years-on
NAIRU is a ritual of human sacrifice.
Who in their right mind (mentally stable) would ever assume there is a “natural” rate of unemployment? And why would anyone assume there is a natural connection between this rate and economic inflation? These are off-the-wall assumptions with little empirical foundation. Yesterday, Isabel V. Sawhill, Senior Fellow – Economic Studies, Center on Children and Families, Future of the Middle Class Initiative published a Brookings Institute piece titled, “We need to rethink our economic assumptions.” It demonstrates two things about such economics as NAIRU. “Perhaps they go to the core of our beliefs about how the world works, what makes the economy tick, and how this relates to human welfare.” In other words, economics is not the same as human life, it is a tool we use to help create that life. You’ve read this before from me. Culture is human life; economics is just one piece of culture. Sawhill’s definition of neoliberalism fits this view of economics; neoliberalism is “a belief in the efficiency of markets.” Those who hold this belief, assert that this belief alone addresses both the problems created by markets and all the other aspects of human society. Government is no longer necessary; human freedom is assured; humans will always act rationally; human physical and psychological needs are met. Neoliberalism, to the extent its believers accept these, also ensures humans have a sense of community, can take actions to care for others, give and receive respect of peers, and meet the desire of humans to comply with social norms and moral or religious principles. The central precept of neoliberalism argues against any of these occurring. What matters most is peoples’ pay. Neoliberalism claims it ensures each person is paid what they are worth. In response to this absurd and dangerous situation, Sawhill quotes former French Prime Minister Lionel Jospin, we can “say yes to a market economy but say no to a market society.” This is her way of avoiding the obvious conclusion, neoliberalism is dysfunctional. Instead she hedges her bets, “As an economist, I was schooled to think along neoliberal lines and still hang out with people for whom this type of thinking is second-nature. I wouldn’t want to throw out the existing paradigm unless I thought there was something better in the wings. But I am becoming wobbly. Why? Because the evidence is mounting that a) the assumptions of neoliberalism are unrealistic and b) it has led to distrust of almost any kind of government action to temper or complement market activity.” Reaching this conclusion required over 50 years for Dr. Sawhill. Either the discipline’s indoctrination is more effective than anyone assumed, or economists are dumber than anyone imagined.
None of you guys is addressing the underlying logic of NAIRU, just objecting to its consequences. If you had worked with automatic control systems like I did back in 1960, one realises that to drive the system at a certain speed one had to have a shortfall in the speed to signal the power to drive it at that speed; the heavier the load the bigger the shortfall. If one carries that effect in a production control system forward into a distribution control system seeking a steady rate of profits, the error driving it can be either a shortfall in production or a rise in price. What is so sickening is that Keynes had the answer even before control system theory had been articulated, and all you guys accept what non-Keynesian monetarists have called Keynesianism (consumerism) rather than what Keynes proposed: employment outside the commercial field in the maintenance and development of infrastructure. In control theory the equivalent is compensating for the normal shortfall by automatically increasing the average speed setting; or in navigation, by resetting the course from time to time to allow for drift.
Employment, like not being employed are contingent. Contingent on time and place, the circumstances of each human life. In 18th century Britain, lack of jobs increased crime as those without employment had only two possibilities before them – starvation or a life of crime. Consequently, the UK’s prisons were filled to overflowing with the unemployed and the hangman busy dispatching the unemployed from this life. The gallows constituted a poor remedy for unemployment and its results, but the English courts were bent on suppressing crime rather than altering the conditions out of which crime grew. Many of these prisoners managed to “escape” to America or were deposited there by the British government. Here things were different. In America, labor was scarce and there was less incentive to crime. Unemployment was unknown, land cheap, food abundant, wages high. No one had the excuse of desperate poverty for adopting a life of crime. The situation is the more interesting in the light of the attempts of the English authorities to export criminals to the colonies. Although Britain did at times lighten the expenses of maintaining its prisons by “deporting” prisoners to America, this did not change the situation in America. Most prisoners from Britain in America, even the hardened and bitter ones became hard-working and law-abiding citizens in America and committed few additional crimes. Which surprised the British, believing as they did that criminality was a “character” flaw that could not be changed. There was little unemployment in America, thus less poverty and misery, and thus less criminality. This little story demonstrates, in my view, that there is no “natural” rate of employment or unemployment, except that which reflects the historical circumstances that is the situation of people’s lives.