Pigou claims another victory over Keynes

The path taken by unemployment over the period of the recession is very odd. During recessions unemployment should go up as real output falls. In line with this employment should fall.

Well that has not happened for a lot of this recession and explanations of why that is the case are far from complete.

The article below, by Stephanie Flanders of the BBC, looks at some of the issues. It could be because so many of the new jobs, over half a million more than two years ago, are part time. It might be because those who have chosen self-employment over unemployment are actually 'self-unemployed' having no significant work to do.

Two explanations Flanders does not mention are:
1. The effect of mobile European workers - if they go home when there are no jobs this stops unemployment rising as each job is lost. This only explains the low rise in total unemployment.

2. Real wage rates have fallen, allowing firms to employ more people.

The second explanation is simply markets working as they should in a microeconomic sense. When there is a surplus of a product then price falls. This encourages higher demand, but lower supply and the market clears.

Pigou and other leading economists explained that this is what would happen at the start of the Great Depression and that this would lead to unemployment falling and output recovering. Of course the 1930 recession continued into the Great Depression and Keynes explained this by saying wages were 'sticky downwards' and the market adjustment didn't happen.

The supply-side reforms to the labour market and the draconian approach to public sector pay since 2009 have allowed real wages to drift down. Firms can now afford to take on workers with lower productivity and so employment could rise with a lower rise in real GDP associated with it.

There are multiple factors at play here, but I'd like to think that Pigou got this one right.

Stephanie Flanders article is here

New Keynes papers prove Keynesian's wrong

Papers belonging to John Maynard Keynes were discovered in the archives of King's College Cambridge last year. Since then academics have been studying the manuscripts dated between 1940 and 1946.

Keynes was engaged in war work throughout that period and published nothing on economic theory, although he had stated that he intended to write a revised edition of the 'General Theory' in 1938 and had told Hayek that he could 'easily deal with' those such as Joan Robinson who were using his ideas for their own purposes. Keynes died in 1946 before the revised edition had been submitted and many of the papers are his revised draft of that book.

To the distress of many Keynesians, recently crawled out from under their stones, Keynes revises his view of the economy and states that demand management techniques only have a role in the very short term.

One section states; "In periods of severe restriction of aggregate demand, such as in the period of the recent depression, {1929 - 33} then it is the role of responsible government to abandon the pursuit of a balanced budget and boost national output through deficit finance."

He continues later; "Many have taken my meaning to be that government should seek to manage the level of national output through persistant budget deficits. This would lead to unsustainable debt and ignores the crucial importance of increasing productive capacity. Generally government should seek to balance their budgets to allow the industrial sector to create the wealth necessary for growth and improved living standards."

Professor Bob Williams of the WBO commented "Keynes was clearly preparing to put the world straight on a massive mis-interpretation of his work. He makes it clear that demand management is an emergency measure only and that classical, or monetarist views were those that should be used in normal times."

Professor Lord Robert Skidelsky, Keynes' biographer is quoted in The Sunday Times as saying; "I was wrong. I am devistated. These papers make it clear that Keynes never changed his views from 'The Treatese on Money' in 1930 but saw the Great Depression as a special case. I don't know what I will do now."

Well I always said Keynesians were wrong!

Full story here