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description= 15 posts published by Lars Syll during September 2014;
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ned the financial developments during a boom that makes a crisis likely if not inevitable are hinted at but not thoroughly examined this is the logical hole the missing link in the general theory as it was left by keynes in 1937 after his rebuttal to viner in order to appreciate the full potential of the general theory as a guide to interpretation and understanding of moderrn capitalism we must fill out what keynes discussed in a fragmentary and casual manner share on facebook opens in new window facebook share on x opens in new window x share on bluesky opens in new window bluesky further reasons to reject nairu lock stock and barrel 25 sep 2014 at 15 19 posted in economics comments off on further reasons to reject nairu lock stock and barrel this paper has reasserted the post keynesian view that unemployment is essentially driven by private investment behaviour there is a feedback from the labour market via price and wage inflation to the goods market but it is weak without government policy the goods market reactions may even be perverse and as we are presently reminded the scope of monetary policy is limited in times of financial crises and in times of deflation second the labour market itself is more adaptive than commonly assumed the nairu is endogenous due to the supply side effects of capital accumulation and the importance of social norms in wage setting thus there is a well defined nairu that determines wage and price inflation in conjunction with actual unemployment in the short term but it is endogenous and changes along with actual unemployment in the medium term while monetary policy exerts some impact on investment decisions there may be other reasons for private investment to fall below the level necessary for full employment keynes himself had famously argued that it is mostly driven by animal spirits which leaves the economic analyst in the dark as to what actually drives them to some extent these animal spirits will depend on specific institutional structures and the degree of uncertainty regarding the future evolution of important macroeconomic variables or corporate governance structures but overall it is fair to say that investment expenditures cannot be easily reduced to underlying variables our analysis has important policy implications rather than regarding the role of the state as having to provide conditions in the labour market as close as possible to perfect markets our analysis highlights the role of the state as a mediator of social conflict and as a stabiliser of economic activity if the private sector is prone to long lasting swings in economic activity due to changes in animal spirits or the aftermath of financial crises and the nairu is endogenous maintaining employment at high level in the short run is crucial to that end monetary policy will in general not be sufficient and an active counter cyclical fiscal policy is needed finally wage policy is crucial in terms of controlling inflation as well as in terms of stabilizing income distribution wage flexibility will not cure unemployment fiscal policy is the main tool of short run stabilization and wages policy aims at wages growth in line with labour productivity engelbert stockhammer share on facebook opens in new window facebook share on x opens in new window x share on bluesky opens in new window bluesky natural rate of unemployment a fatal fallacy 25 sep 2014 at 08 48 posted in economics comments off on natural rate of unemployment a fatal fallacy it is thought necessary to keep unemployment at a non inflation accelerating level niaru in the range of 4 to 6 if inflation is to be kept from increasing unacceptably the underlying assumption that there is an exogenous niaru imposing an unavoidable constraint on macroeconomic possibilities is open to serious question on both historical and analytical grounds historically the u s enjoyed an unemployment rate of 1 8 for 1926 as a whole with the price level falling if anything west germany enjoyed an unemployment rate of around 0 6 over the several years around 1960 and most developed countries have enjoyed episodes of unemployment under 2 without serious inflation thus a niaru if it exists at all must be regarded as highly variable over time and place it is not clear that estimates of the niaru have not been contaminated by failure to allow for a possible impact of inflation on employment as well as the impact of unemployment on inflation a marxist interpretation of the insistence on a niaru might be as a stalking horse to enlist the fear of inflation to justify the maintenance of a reserve army of the unemployed allegedly to keep wages from initiating a wage price spiral one never hears of a rent price spiral or an interest price spiral though these costs are also to be considered in the setting of prices indeed when the frb raises interest rates in an attempt to ward off inflation the increase in interest costs to merchants may well trigger a small price increase indeed if we are to control three major macroeconomic dimensions of the economy namely the inflation rate the unemployment rate and the growth rate a third control is needed that will be reasonably non collinear in its effects to those of a fiscal policy operating through disposable income generation on the one hand and monetary policy operating through interest rates on the other what may be needed is a method of directly controlling inflation that do not interfere with free market adjustments in relative prices or rely on unemployment to keep inflation in check without such a control unanticipated changes in the rate of inflation either up or down will continue to plague the economy and make planning for investment difficult trying to control an economy in three major macroeconomic dimensions with only two instruments is like trying to fly an airplane with elevator and rudder but no ailerons in calm weather and with sufficient dihedral one can manage if turns are made very gingerly but trying to land in a cross wind is likely to produce a crash it is important to keep in mind that divergences in the rate of inflation either up or down from what was previously expected produce merely an arbitrary redistribution of a given total product equivalent at worst to legitimized embezzlement unless indeed these unpredictable variations are so extreme and rapid as to destroy the usefulness of currency as a means of exchange unemployment on the other hand reduces the total product to be distributed it is at best equivalent to vandalism and when it contributes to crime it becomes the equivalent of homicidal arson in the u s the widespread availability of automatic teller machines in supermarkets and elsewhere would make the shoe leather cost of a high but predictable inflation rate quite negligible william vickrey h t jan milch share on facebook opens in new window facebook share on x opens in new window x share on bluesky opens in new window bluesky ditch the nairu 24 sep 2014 at 21 41 posted in economics 5 comments the most important implication of the conventional nairu equation however is that there is no role whatsoever for demand factors in determining equilibrium unemployment any attempts by fiscal or monetary policy to permanently move actual unemployment away from its equilibrium level u is doomed to failure policy may succeed in temporarily lowering unemployment thus causing inflation which in turn will undermine demand and raise unemployment until the equilibrium or natural rate of unemployment is reached again demand will adjust itself to the natural level of output corresponding to the rate of equilibrium unemployment either passively through the so called real balance effect or alternatively more actively through a policy administered rise in interest rates in the latter case actual unemployment is determined by how large the central bank thinks the nairu is the implication of the conventional nairu equation is that employment policy should focus exclusively on the labor market and not on aggregate demand and investment and above all on the behavior of labor unions and mostly welfare state related wage push factors the policy recommendations are straightforward to reduce unemployment labor markets have to be deregulated employment protection labor taxes and unemployment benefits have to be reduced wage bargaining has to be decentralized and welfare states have to be scaled down however although the view that labor market regulation explains oecd unemployment has become widely accepted particularly in policy circles it is by no means universally accepted serious problems remain even authors working within the orthodox nairu approach are unable to explain changes in long run unemployment in terms of only excessive labor market regulation to explain changes in u most empirical studies consider it necessary to include other additional factors which might explain short run deviations of unemployment from its equilibrium level the most important of which are aggregate demand shocks i e import price and real interest rate shocks and productivity shocks the inclusion of such shocks is not an innocent amendment because it turns out that a significant part of the oecd unemployment increase during the past three decades must be attributed to these shocks this is obviously a dissatisfactory state of affairs in the theoretical analysis the impact of demand factors on equilibrium unemployment is defined away but in the empirical analysis it has to be brought back in not as a structural determinant but rather as an exogenous shock we argue that this incongruence points to a misspecification of the nairu model servaas storm c w m naastepad share on facebook opens in new window facebook share on x opens in new window x share on bluesky opens in new window bluesky macroeconomics beyond nairu 24 sep 2014 at 08 16 posted in economics comments off on macroeconomics beyond nairu highly paid labour is generally efficient and therefore not dear labour a fact though it is more full of hope for the future of the human race than any other that is known to us will be found to exercise a very complicating influence on the theory of distribution alfred marshall why be consistent 23 sep 2014 at 08 16 posted in economics 1 comment axioms of internal consistency of choice such as the weak and the strong axioms of revealed preference are often used in decision theory micro economics game theory social choice theory and in related disciplines paul samuelson s 1938 justly famous foundational contribution to revealed preference theory can be interpreted in several different ways one interpretation that has received much attention in the subsequent literature and has had a profound impact on the direction of economic research is the program of developing a theory of behavior freed from any vestigial traces of the utility concept samuelson 1938 p 71 while this was not in line with john hicks s earlier works particularly his value and capital hicks 1939 which began with the priority of the concept of preference or utility hicks too became persuaded by the alleged superiority of the new approach this paper argues against this influential approach to choice and behavior and indicates the inescapable need to go beyond the internal features of a choice function to understand its cogency and consistency at the foundational level the basic difficulty arises from the implicit presumption underlying that approach that acts of choice are on their own like statements which can contradict or be consistent with each other that diagnosis is deeply problematic can a set of choices really be seen as consistent or inconsistent on purely internal grounds without bringing in something external to choice such as the underlying objectives or values that are pursued or acknowledged by choice the presumption of inconsistency may be easily disputed depending on the context if we know a bit more about what the person is trying to do suppose the person faces a choice at a dinner table between having the last remaining apple in the fruit basket y and having nothing instead x forgoing the nice looking apple she decides to behave decently and picks nothing x rather than the one apple y if instead the basket had contained two apples and she had encountered the choice between having nothing x having one nice apple y and having another nice one z she could reasonably enough choose one y without violating any rule of good behavior the presence of another apple z makes one of the two apples decently choosable but this combination of choices would violate the standard consistency conditions including property a even though there is nothing particularly inconsistent in this pair of choices given her values and scruples we cannot determine whether the person is failing in any way without knowing what he is trying to do that is without knowing something external to the choice itself amartya sen share on 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