Thursday, November 13, 2014

Peter Temin and David Vines — Why Keynes is important today

The current debate on the efficacy of Keynesian stimulus mirrors the resistance Keynes met with when initially advocating his theory. This column explains the original controversy and casts today’s policy debate in that context. Now that concepts of Ricardian equivalence and the fiscal multiplier are formally defined, we are better able to frame the arguments. The authors argue that a simple model of the short-run economy can substantiate the argument for stimulus.
Vox.eu — CEPR's Policy Portal
Why Keynes is important today
Peter Temin, Elisha Gray II Professor Emeritus of Economics, MIT, and David Vines. Professor of Economics, Oxford University; Fellow of Balliol College, Oxford; Director of the Centre for International Macroeconomics, Oxford; CEPR Research Fellow

"Sticky wages"?
The stickiness of wages seems to be one of the key stylized facts of economics. For some reason, the idea that sticky wages may be the key to explaining business-cycle downturns in which output and employment– not just prices and nominal incomes — fall is now widely supposed to have been a, if not the, major theoretical contribution of Keynes in the General Theory. The association between sticky wages and Keynes is a rather startling, and altogether unfounded, inversion of what Keynes actually wrote in the General Theory, heaping scorn on what he called the “classical” doctrine that cyclical (or in Keynesian terminology “involuntary”) unemployment could be attributed to the failure of nominal wages to fall in response to a reduction in aggregate demand. Keynes never stopped insisting that the key defining characteristic of “involuntary” unemployment is that a nominal-wage reduction would not reduce “involuntary” unemployment. The very definition of involuntary unemployment is that it can only be eliminated by an increase in the price level, butnot by a reduction in nominal wages. 
Keynes devoted three entire chapters (19-21) in the General Theory to making, and mathematically proving, that argument. Insofar as I understand it, his argument doesn’t seem to me to be entirely convincing, because, among other reasons, his reasoning seems to involve implicit comparative-statics exercises that start from a disequlibrium situation, but that is definitely a topic for another post. My point is simply that the sticky-wages explanation for unemployment was exactly the “classical” explanation that Keynes was railing against in the General Theory.….
David Glasner, Why Are Wages Sticky?

1 comment:

Magpie said...

Very good articles. Glasner's in particular (the bad thing: I just wish it were not so exasperatingly long).

Perhaps Chris Dillow's 500-word rule of thumb is too strict, but Glasner rarely, if ever, makes less than 1,600-1,700 words.

People really need to cultivate the virtue of succinctness.