Friday, February 25, 2011

Keynes's General Theory Ch 5

I finally read a chapter by Keynes that actually makes sense. In Ch. 5 Keynes argues that changing expectations affect employment. Indeed. The examples he gives are of particular firms' owners' expectations changing with changing conditions over time. Indeed, it is important to take time into consideration -- something neoclassical economics still manages to avoid. It makes sense that changing expectations by firms' owners will affect employment decisions by those firms. How, though, is this related to the idea of aggregate employment? A given firm's owner has to adjust his expectations based on the changing market, and this necessarily affect employment at his firm. He has to hire a few more or lay some people off. This is obvious enough. We have a wide variety of firms engaging in these kinds of calculations, resulting in subtle changes in (un)employment over time and space. Good enough microeconomics, but, again, what relation does this have with aggregate (un)employment? It doesn't have to have any, as far as I can tell.

Consider the following. We have an economy at "full employment" -- let us say for argument's sake that it is an unemployment rate between 4-5%. There is thus a full employment equilibrium at 4% and at 5% unemployment. This constitutes those who are between jobs, temproarily laid off, etc. The real unemployment rate of course actually fluctuates between the two. Between these two equilibria is a far-from-equilibrium state (a far-from-equilibrium state does not mean there are radical swings from, say 4% to 90% unemployment, but rather that the system cannot settle down on either of two equilibria, such as 4% or 5%, and thus fluctuates between the two). Each and every firm making its own decisions regarding expectations results in a wide variety of judgments of needed employment to produce their particular products. If a particular job requires particular training, it may take longer to get new workers -- and equally, if such a company lays people off, those people may need to be retrained to do other things -- both of which result in delays and, thus, temporarily higher unemployment (than, say, the low of 4%). All of which are disequilibrating. The heterogeneity of labor thus has a significant effect on (un)employment, keeping the system in a far-from-equilibrium state. The good news, though, is that systems with such states are the most creative and generative. Surely we want a creative, generative labor market. Equilibrium is something we want to avoid, as that means stagnation and a lack of growth.

In other words, if we avoid Keynes' notion of aggregates, there is something worth thinking about -- at least, in chapter 5.
Post a Comment