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Tuesday, October 12, 2010

Keynes: Disconnect b/w capital and labor markets

"The fact that an unforeseen change only exercises its full effect on employment over a period of time is important in certain contexts;-in particular it plays a part in the analysis of the trade cycle (on lines such as I followed in my Treatise on Month). But it does not in any way affect the significance of the theory of the multiplier as set forth in this chapter; nor render it inapplicable as an indicator of the total benefit to employment to be expected from an expansion in the capital-goods industries. Moreover, except in conditions where the consumption industries are already working almost at capacity so that an expansion of output requires an expansion of plant and not merely the more intensive employment of the existing plant, there is no reason to suppose that more than a brief interval of time need elapse before employment in the consumption industries is advancing pars passu with employment in the cap ital-goods industries with the multiplier operating near its normal figure." -J. M. Keynes, General Theory 

Keynes is basically saying (in the round-about way he does) that his Keynesian multiplier effect on spending should be highly correlated to the amount of labor employment created due to the increased spending.  IE, he assumes that his spending will lead to income multiplied which will increase the buildup of capital and GDP/output  and employment  of labor, quickly, not just capital spending alone... and not after too long of a time.   But our government's most recent 'experiment' in Keynesian economics calls into question the ability for simple Keynesian spending to quickly increase labor employment.   Unemployment has hovered at 9.6% for the last number of months despite increases in spending.  This is not a huge surprise as unemployment tends to linger for a long time after spending rebounds, but the lag is a problem for which Keynes assumes to not exist. 


If employment is the important variable for a Keynesian, why focus on spending?  Why not focus on employment multipliers?  Or as some post-Keynesians might advocate, why not have the government buffer employment more directly?  (I have mentioned reasons I think the latter is a bad idea)  Keynes' error was in assuming the majority of private industry would hire workers line-to-line with capital.  This simply isn't true.  The structure of our economy is that there are often large deviances between industry.  Further, it is also likely that a firm's first response will be to milk productivity out of existing workers as opposed to taking the hiring risk.  

8 comments:

JTHeadlines said...

But what about states/municipalities cutting back on spending at the same time as the federal government rolled out the stimulus?

Garth said...

JTH...
I think that is an equally interesting problem.


At the same time you have the Fed giving monetary handouts, you have the States taking it back or cutting back significantly either in increased taxes or in reduced education, infrastructure, security spending, etc.

I don't know how much of that behavior is accounted for in the Fed's models. That could be a reason for explaining why the stimulus didn't yield the expected result - it far under-predicted the depth of the problem perhaps because it under-predicted the States' problems.

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