In Skousen's Dissent on Keynes, Chapter 2, John Egger writes:
A five-percent reduction in workers' wage demands would not stimulate employment, he [=Keynes] argued, because employers would anticipate a resulting five-percent reduction in the demands for their products and would simultaneously reduce their demand for labor. As Peter Clarke puts it, "If prices and wages simply chased each other down a spiral—since 'one man's expenditure is another man's income'—then in theory there was no means of effecting the necessary cut in real wages".
Sounds convincing. Is there a response? I think Egger hints at one in the next paragraph, where he writes:
The claim that the market is incapable of achieving a pattern of prices consistent with demands is Keynes's rejection of Say's law.
In other words, if we accept Say's Law, that products are what pay for other products, then even if wages go down, there is no reason for employers to anticipate a resulting five-percent reduction in the demands for their products, since lower wages does not mean less production. The apples to pay for the oranges Mr X is making are still out there, even if Mr X and everyone else pays lower wages.
Egger later writes:
General economic malaise results from inappropriate patterns of money prices, which reduce incomes and production and produce unemployment. The total amount of money that people want to, or actually do, spend is completely irrelevant. Aggregate demand is an unintended result of individuals' actions and has no causal role in determining them. But if aggregate demand is irrelevant to action and has no meaning in an analysis of the functioning of a market system, there can be no standard for determining that it falls short of some ideal, and there can be no such thing as unemployment caused specifically by this shortfall. All unemployment is caused by mispricing, and none by insufficient aggregate demand. This, in turn, implies that a policy designed to reduce un- employment by bringing aggregate demand closer to its ideal is fundamentally misconceived from the start. The result is typical of well-intentioned efforts to solve problems that do not exist: the problems that do exist are made worse.
I was blown away by this paragraph. He's saying that AD is like the spent shells after a gun fight. The amount of spent shells is never a cause for gunfights one way or another, it is an irrelevant variable, a meaningless byproduct, and should be ignored when we study gunfights. Similarly, AD is irrelevent to economic actions.
And why is AD irrelevant? Because what counts is whether prices match what the market [=supply and demand] would like them to be. The prices are what determine economic action. If they are aligned with supply and demand, the economy will thrive. If not, it will stagnate. What effect has AD on prices? It certainly did not determine past prices, because on the contrary, they determined it. As for future prices, AD might determine what the market would like them to be, but it has no say in whether prices will actually match what the market wants them to be. That happens by itself in a free market, or is hampered by govt interventions in an unfree market. But AD is indeed irrelevant.
If we assume Say's law is false, how does that change the picture? Because then we can claim that it's not supply that gives one ability to demand, but demand that magically determines supply. This makes AD very inportant indeed. Reduce it and you magically reduce production, which means poverty.
Now a Keynesian might argue like this: Forget about prices. They are fixed. Set in stone, they cannot ever change. [Ridiculous as it sounds, there are actually people who claim this]. So if prices do not match what they should be, given the current supply and demand, we have to increase demand. Doing so will raise what the laws of supply and demand indicate the price should be to equate with what they are fixed at.
Stated so baldly, we see some problems.
First, there is not one price for everything. The market, if left to itself, will adjust every single price of every single item. But how can a politician take an action that will set every last price to what will clear every last market? It's like throwing a bottle of ink on a canvas and hoping that out comes the Mona Lisa. You can't possibly fine tune your toss to do that.
Second, there is a morality argument here. If peope have chosen not to buy, what right have we to force them to buy, or what is worse, pay for what the govt buys for itself and its pals?
Ramble is long already. Would be glad to see comments.
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It's easy to refute an argument if you first misrepresent it. William Keizer
Ironically, it seems that Keynes assumed full employment.
Indeed, if all people are employed, a decrease in wages results in a decrease in monetary aggregate demand (I assume here that AD is relevant).
But, if some people are unemployed because the wage rates are too high, a decrease in theses wages can bring them back to work, increase their real wages (from 0 to X), and, finally, enhance the AD.
See also this article by Murphy.
Excerpt:
But there are other problems with Keynes's analysis. Consider: What is the actual mechanism through which falling costs lead to falling retail prices? We start in an initial equilibrium, where workers earn (say) $10 per hour, and the retail good sells for $100. Firms are happy with the number of workers they have employed at $10 per hour, and the amount of goods they can sell at $100 each. Now, because unemployment is very high, the firms can get away with cutting their workers' pay to $9 per hour. Holding everything else constant, they are making more profit than before. What would induce them to lower their retail price from $100? The obvious answer is that they want to capture a larger share of the market. That is, they want to sell more units of the retail good to their customers. They can't do this with their original labor force. No, in order to make it profitable to cut their retail price, they need to hire more workers and boost output.
But there are other problems with Keynes's analysis. Consider: What is the actual mechanism through which falling costs lead to falling retail prices? We start in an initial equilibrium, where workers earn (say) $10 per hour, and the retail good sells for $100. Firms are happy with the number of workers they have employed at $10 per hour, and the amount of goods they can sell at $100 each.
Now, because unemployment is very high, the firms can get away with cutting their workers' pay to $9 per hour. Holding everything else constant, they are making more profit than before. What would induce them to lower their retail price from $100?
The obvious answer is that they want to capture a larger share of the market. That is, they want to sell more units of the retail good to their customers. They can't do this with their original labor force. No, in order to make it profitable to cut their retail price, they need to hire more workers and boost output.
Look at the respones to Paul Krugman articles in the blog: "krugman-in-wonderland.blogspot.com". Professor Anderson's arguments against Krugman's version of Keynesian Economics are more basic in that this theory of economics also violates not only Say's Law but also the Law of Scarcity and the Law of Opportunity Costs. And it also violates the Law of Diminishing Marginal Utility as well.
See also this article by Murphy...Holding everything else constant, they are making more profit than before.
I think that's the key line. When workers are paid less, the money doesn't vanish out of existence. Less for the employee means more for the employer.
Krugman in Wonderland hits the spot!
TY for the responses, R. and B.
When workers are paid less, the money doesn't vanish out of existence. Less for the employee means more for the employer.
Indeed, that seems to be a more direct refutation.
Smiling Dave:In Skousen's Dissent on Keynes, Chapter 2, [...]
I just wanted to mention that I JUST completed an EPUB of this book a few days ago. I became quite excited when I saw somebody actually was reading the book! It will be much easier to search/copy and paste from the EPUB than from the PDF version:
http://misesbooks.blogspot.com/2013/05/dissent-on-keynes-critical-appraisal-of.html
Also in the future, please link to the actual book page instead of directly to the PDF, so if newer file types of the book get posted, anyone can easily grab whatever format they prefer(do not want those nice EPUBs to get lost in the abyss!):
https://www.mises.org/document/3682/Dissent-on-Keynes-A-Critical-Appraisal-of-Keynesian-Economics
Raoul:See also this article by Murphy.
Speaking of this article and Keynes, Bob Murphy's class on the subject was quite good in covering a many of Keynes's ideas from the General Theory, making the best case for them, and then destroying them. (Bob Murphy is quite good at this, I am always reminded of the "Austrian vs. Neoclassical Analytics" speech he gave at MU2009).
Perhaps you can get in contact with him and get his slides from his course:
http://academy.mises.org/courses/keynes-krugman-and-the-crisis/
Thank for this new ebook! So far, I abstained from reading this book entirely because I found only a bad PDF of it... Nevertheless, I saw that the chapter about the history of anti-Keynes books was very interesting. The article by Herbener about the multiplier is also worth reading, if I remember correctly. I look forward to reading the whole book in a HQ version.
Tex,
How does one do a search of the epub file?
I use firefox with an extension called epub reader, and there's no way to search with that.
Which program do you recommend?
Forgive for the sidetrack, but:
Raoul:Thank for this new ebook! So far, I abstained from reading this book entirely because I found only a bad PDF of it...
Exactly how I felt with reading all of these free books on Mises! So now I just EPUB everything under the sun. Feel free to leave any requests in the (Semi-)Official Mises.org EPUB Release Topic. If I get requests I try to move those to the top of my conversion list to work on in my spare time.
Raoul:Nevertheless, I saw that the chapter about the history of anti-Keynes books was very interesting. The article by Herbener about the multiplier is also worth reading, if I remember correctly. I look forward to reading the whole book in a HQ version.
Sadly, I do not get much reading done any more (so I do not know the exact content of Dissent on Keynes), but hopefully I am indirectly helping benefit many more people with the EPUB versions into reading the books. Plus it just allows EASY copy/pastability into forums for debates/discussions. (I cringed a little at the formatting of the quotes in the initial post).
Smiling Dave:How does one do a search of the epub file? Which program do you recommend?
Depends on what you want to read on.
If you are reading on the PC, I recommend Sigil (it is the EPUB editor that I use, but it works great as a reader), you can use Calibre (this is a library management program mostly for organizing digital books), or if you want to render it the same way it would show up on (most) ereaders, you CAN use Adobe Digital Editions (although I think the program is crap). There are also "Nook" and "Sony" readers (plus a few others) for PC (pretty crappy as well).
Long story short, on PC+Linux+Mac, use Sigil or Calibre.
If you have an Android phone, I recommend Mantano Reader (sadly it is not free, but it is well worth it if you will do lots of reading on the phone).
As to mobile Apple products, I have no idea. All I know is avoid iBooks like the PLAGUE.
Sigil looks good.
Here's something from Dissent on Keynes, Chapter Two by John Egger:
The effect of stimulative fiscal policy on this kind of unemployment can be dramatized with an analogy.
A skilled painter faces a partially completed canvas, racked by indecision about how to continue, how to depict the emotions he seeks to convey. Suddenly, into the studio strides a woman carrying a small can of Sears’ “Federal Blue” interior latex. “Help from the government,” she announces, as she wedges a two-inch polyester brush into the can and fills the empty canvas with broad strokes. The problem of the unemployed canvas is solved, and the widely reported ratio of square inches painted to total square inches increases. Someone is sure to note that “Federal Blue” is better than nothing, and we cannot be certain that the work would ever have been completed. But surely most of us are likely to consider the act one of wanton destruction. Besides dramatically violating the artist’s property rights, it substantially increases the costs of achieving his goal, perhaps precluding it entirely. There is a permanent reduction in wealth.
Economists, who understand the usefulness of natural unemployment, are unlikely to consider the blank portion of the painter’s canvas to be wasted, that is, inefficiently or suboptimally employed. Because the artist was provided with a low-cost opportunity to complete the work, that blank canvas is very likely being employed in the highest-valued imaginable way.
The assumption that the labor services of those suffering from natural unemployment are necessarily not being used optimally is, just as surely, unfortunate and incorrect. W. H. Hutt, referring to a job seeker, argued that “when actively searching for work, the situation is that he is really investing in himself by working on his own account without immediate remuneration. He is prospecting.” Hutt adds, “Individuals actively ‘prospecting’ for remunerative jobs are employed” (Hutt [1939] 1977: 83).