Sunday, May 17, 2015

Bill Mitchell — Demand and supply interdependence – stimulus wins, austerity fails

My Phd research, was in part, exposing the myths in conventional or mainstream economics arguments that claim that structural imbalances in the labour market arise independently of the economic cycle and hence, aggregate spending. The mainstream used this assertion to draw the conclusion that government policy could little to bring unemployment down when mass unemployment was largely ‘structural’ in nature. Instead, they proposed that supply-side remedies were necesary, which included labour market deregulation (abandoning employment protection etc), minimum wage and income support cuts, and eroding the influence of trade unions. At the time, the econometric work I undertook showed that so-called structural imbalances were highly sensitive to the economic cycle – that is, the supply-side of the economy was not independent of the demand-side (the independence being an article of faith of mainstream analysis) and that supply imbalances (for example, skill mismatches) rather quickly disappeared when the economy operated at higher pressure. In other words, government fiscal policy was an effective way of not only reducing unemployment to some irreducible minimum but, in doing so, it increased the effectiveness of the labour force (via skill upgrading, higher participation rates etc) – that is, cleared away the so-called structural imbalances. A relatively recent paper from researchers at the Federal Reserve Board in Washington – Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy – finds new US evidence to support the supply-dependence on demand conditions. It is a case of stimulus wins whereas austerity fails....
Bill Mitchell – billy blog
Demand and supply interdependence – stimulus wins, austerity fails
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

2 comments:

Matt Franko said...

libertarianism is still too strong here in the US for any new stimulus...

the libertarians and their invisible hand (very pagan concept) still have the upper hand...

Tom Hickey said...

I would not say that the concept of the invisible hand is "pagan." "Pagan" has two dictionary meanings, polytheistic and irreligious, especially in the sense of not believing in "the (biblical) God of our fathers." Obviously the former doesn't apply and the latter only somewhat marginally.

The invisible hand was an 18th century British concept best known through Adam Smith, but his view was quite undeveloped wrt to the way it came to be understood subsequently.

The idea is parallel to and may have emerged from the replacement of the Great Chain of Being with a scientific world view, which at the time was based on Newtonian physics. This was not necessarily materialistic though. The personal anthropomorphic God of Judaism, Christianity (and Islam) was replaced with a divine principle. Deism was the belief that the deity as divine principle winds the clock and then just lets it run. It seems pretty evident to me that Deism was bound up in the concept of the invisible hand, but historians have found no textual evidence tightly linking them.

There is also a trend in 18th century liberalism that supports this view, namely that God created all men with an equal right to life, liberty, and the pursuit of happiness. A core assumption of classical liberalism was in natural spontaneous order as God's will and all humans had to do was get out of the way of its operation by freeing economies from government intrusion and by instituting republican political control based on democratic elections, sort of. This view was far from popular participatory democracy, in that the franchise was limited to those who were suitably "qualified."

In fact, one can view this as a spontaneous development of Western civilization once science was added to the mix of factors influencing it. So it is not accidental that conventional economics is so insistent on being considered "scientific." Conventional economists would like to join other scientists as the new priesthood as arbiters of the new "religion" (dominant cultural ideology)

So I would say that this is is the outcome of a transition from the Middle Ages to the Modern Era in which the Great Chain of Being was replaced with Positivism, liberalism replaced hereditary oligarchy and autocracy, industry became more important socially and economically than agriculture, and capitalism replaced feudalism as the economic infrastructure of society.