Here’s the US debt story with a bit of historical perspective. Here we find an example of Change You Can Believe In care of the blessedly departed Barack Obama. Consequences include slower growth, limited if not actually negligible increases in the real wage, additional upwards pressure on the price level and some additional increases in rates of interest. But really, where’s the constituency to do anything else? How many non-Keynesians are there, never mind anti-Keynesians?
Remember this? Remember how it ends?
What’s changed and how you gonna change it? Still, there are regulations going and public spending is being better targeted. Large numbers are being peeled from the welfare rolls. Not good, but if the deficit is rising and you’re a Keynesian, what’s the problem? And if you’re not, what are you going to say to convince them otherwise?
Of course, there is then this from Drudge yesterday:
Really, you only wish people knew how things worked, as in some business comes up with an idea, borrows some money to buy in some capital and labour, and then produces that are sold on the market for a profit. There is endless entrepreneurial drive in the US. With a President who is an entrepreneur, who knows what’s possible.
This was posted today on the Societies for the History of Economics (SHOE) website:
Can someone explain Hayek’s (1978) logic:
“I have just published an article in the London Times on the effect of trade unions generally. It contains a short paragraph just pointing out that one of the effects of high wages leading to unemployment is that it forces capitalists to use their capital in a form where they will employ little labor. I now see from the reaction that it’s still a completely new argument to most of the people. [laughter]”
In further explanation of his puzzlement, he pointed out that this makes no sense using marginal productivity theory since everything else will re-adjust to create full employment so what was Hayek trying to say. I therefore gave my explanation which followed behind another explanation given by James Ahiakpor, the only other modern day relentlessly anti-Keynesian economist I know of, but this is from me:
In Australia where I was involved in our National Wage Cases on behalf of employers, there was an argument we continually had to deal with which came from the bench and not the unions. It was that raising wages would be good for the economy since it would force businesses to become more capital intensive. The assumption here was that the higher productivity forced on employers would lead to increases in the economy’s ability to finance the higher real wage being imposed.
Marginal productivity theory is part of micro and will tell you what an individual firm will do in the face of higher real labour costs. It does not, however, tell you what will happen across the economy. Forcing real wages higher than the underlying productivity of the economy will support will drive some people out of work. This seems to me so obvious that both then and now it leaves me nonplussed to see it even mentioned, but then I, like James, think about these questions using classical forms of analysis. Unfortunately, like Hayek said, it still seems to be a completely new argument to most people.
The only difference between myself and James is that I would send you to Mill rather than Ricardo.
I suppose that’s one way to look at it: Keynesian economics as a make-work project for anti-Keynesians. On the other hand, if the notion that digging holes to fill them in again doesn’t strike you as the epitome of an insane economic policy then what hope is there for any of us other than for the hole-digging and hole-filling industries, along with businesses in shovel and overalls production. But Alex does get the nature of Keynesian economics 100% right. It is just what Keynes recommended and Krugman to this day supports.
[My thanks to Robert for sending this along. How could I have missed it?]