Monday, October 8, 2012

Keynes, Labor Supply, and Depressions

If alive today, would Keynes join most of the economics profession and assess the current economic situation without any reference to labor supply incentives?

I don't know, but it is worth noting that Keynes' writings about periods of high unemployment consider supply incentives more than his 21st century followers do. In particular, his 1919 Economic Consequences of the Peace repeatedly looks at supply channels.

Europe at the time had a population of 450 million people. I believe that unemployment was a problem at the time, but more important I think Keynes perceived it to be a problem as he describes "that 15,000,000 families were receiving unemployment allowances." If we assume that a 450 million population would support a labor force of about 150 million (ie., excluding women, small children, and noting that the post-war population was likely disproportionately female), that makes an unemployment rate of at least 10% and more to the degree that (as is the case today) some of the unemployed were members of families not receiving assistance.

Notably absent from his extensive discussion of the supply of commodities is the qualification offered by modern-day Keynesians that we don't have to worry about supply constraints until the economy is at full-employment. Instead, he describes how (in the context of describing how price regulations are futile) people may not exert effort if they do not find it sufficiently profitable:

...the regulation of prices, contains in itself, however, the seeds of final economic decay, and soon dries up the sources of ultimate supply. If a man is compelled to exchange the fruits of his labors for paper which, as experience soon teaches him, he cannot use to purchase what he requires at a price comparable to that which he has received for his own products, he will keep his produce for himself, dispose of it to his friends and neighbors as a favor, or relax his efforts in producing it.

If you are open to the idea -- supported by extensive research -- that labor supply incentives might still matter during depressions, take a look at the startling findings in my new book The Redistribution Recession.


Ed R said...

The Keynes of 1919 was not the same Keynes of 1935.

Remember something called The Great Depression happened in the meantime.

JMK was, however, very perceptive and articulate in both years.

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