[OPE] Steve Keen attacks neoclassicist assault on wages (punk economics redux)

 From Steve Keen's blog 3 january 2009 (the whole story is at
http://www.debtdeflation.com/blogs/ ):

(...) My letter critiquing this neoclassical nonsense was published in
today's Sydney Morning Herald (January 3rd 2009):

Giving our pay packets a shave would cost jobs

January 3, 2009

Mark Davis's suggestion that wage restraint would reduce the rise in
unemployment this year is nonsense ("Give your pay packet a shave and
help save jobs
<http://www.smh.com.au/news/opinion/give-your-pay-packet-a-shave/2009/01/01/1230681658489.html?page=fullpage#contentSwap1>",
January 2).

Unemployment will rise in 2009 not because workers were paid too much in
2008 (or earlier), but because households and businesses took on too
much debt during a speculative bubble that has now burst. In the
aftermath, sane people attempt to reduce their debt but that means a
reduction in spending, which causes unemployment to rise.

To reduce that rise in unemployment, you have to tackle the root cause
by making it easier to repay debt. Reducing wages - even cutting the
rate of growth of wages - will make that harder, not easier, especially
since many of those who are trapped by debt are workers.

That Davis's argument is supported by economic modellers confirms that
the case is poorly thought out. These modellers completely failed to
anticipate the global financial crisis because their neoclassical models
ignored the role of debt.

John Maynard Keynes discussed similarly naive thinking during the Great
Depression. Though he agreed that real wages should fall, he said there
were two avenues to achieving it: causing inflation, or reducing wages.

Keynes argued that a fall in money wages would simply cause prices to
fall further, adding to the deflation that made the Depression so
intractable.

He concluded that given the excessive burden of debt and the fact that
falling prices would make debt even harder to repay, "it can only be a
foolish person who would prefer a flexible wage policy to a flexible
money policy". [this is from The General Theory, ch. 19 - JB] . Indeed.

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Received on Sun Jan 4 18:22:17 2009