On May 30, I did a “webinar” with INET’s Young Scholar’s Intiative. The subject was central banking since the financial crisis of a decade ago, and how it forces us to rethink some long-held ideas about money and the real economy — the dstinction between a demand-determined short run and a supply-determined long run; the neutrality of money in the long run; the absence of tradeoffs between unemployment, inflation and other macroeconomic goals; the reduction of monetary policy choices to setting a single overnight interest rate based on a fixed rule.My argument is that the crisis — or more precisely, central banks’ response to it — creates deep problems for all these ideas.
The full video (about an hour and 15 minus, including Q&A) is on YouTube, and embedded below. It’s part of an ongoing series of YSI webinars on endogenous money, including ones by Daniela Gabor, Jo Mitchella nd Sheila Dow. I encourage you, if you’re interested, to sign up with YSI — anyone can join — and check them out.
I didn’t use slides, but you can read my notes for the talk, if you want to.
I didn’t watch the video (as english is not my first language, I doubt I could follow it) but, reading the notes:
in my opinion, the “divine coincidence” is something that depends on two assumptions:
1) declining marginal productivity of labor
and
2) no drive to accumulation per se, but savings are just a tradeoff between present consumption and future consumption.
1)
The declining marginal productivity of labor is, as best as I can understand, the basis of the concept of full employment. Basically, worker 1 has a productivity of 100, worker 2 of 99, etc.
As more workers are employed, wages rise but productivity fall, until worker 50 has a productivity of 50 and all workers have a wage of 50, so that workers’s wage is equal to the marginal productivity of the last worker.
It is assumed that capitalists will go on employing people until they reach this level, that is called “full employment”, because more emplyment at the same or higer wages would mean negative profits on the last workers.
Contemporaneously workers “just” wage is supposed to be determined by the market, so if some worker wants to work but, for example, for a wage of 55, or for a wage of 50 but being worker n.51 with a productivity of 49, s/he is demanding an excessively high wage (according to this theory) and therefore s/he is “willingly” unemployed.
But apart from political considerations it is very dubious that the level of employment, or of full employment, is really determined by worker’s productivity; it is apparent that worker’s productivity is more or less fixed, so that worker 1 has a productivity of 100, worker 2 again of 100 etc., but as employment increases workers can demand an higer share of the pie, so that the profit share falls but not because of falling productivity (there are probably other determinants of the profit share apart from employment).
In this second view it is difficult to define what “full employment” is supposed to be.
As an operating definition, “full employment” is when inflation increases above a certain (arbitrary) level, but this doesn’t automatically prove that this “operative full employment” is the same of the “notional full employment” of the marginalist theory.
I think that this is a big problem for various keynesian theories, because orthodox keynesianism assumes the marginalist concept of full employment and marginalist equilibrium theory, that is most likely bunk, while etherodox theories often reject marginalist equilibrium theory, but still hark back to the concept of “full employment” that only makes sense in marginalist equilibrium theory.
2)
The marginalist equilibrium theory of point 1) leads to the idea that wage share and profit share at equilibrium are predetermined.
The price of capital goods also is assumed to be predetermined, so with a predetermined profit share and a predetermined price of capital, there is alo a predetermined, “natural” rate of profit.
“Savings” are supposed to be the counterpart of productive capital goods (this is the idea behind the idea of good debt VS bad debt), but this implies that the total level of savings, at equilibrium, is fixed (equal to the total value of all capital goods).
If the total level of good savings is fixed, but people still want to save, they have to be disincentivised by lowering the interest rate, if they save too few they must be incentiviset by rising it, so that the total level of savings is consitent to the total value of capital.
But this rests on the idea that there is a definite level of desired savings to income, influenced by the interest rate.
If people just want to accumulate wealth for the sake of it (drive to accumulation), there is no interest rate that is low enough to prevent people from saving, so that there is no natural interest rate consistent with a permanent full employment and no bubbles.
In my opinion, these two points, a definition of “full employment” (or maybe better peak employment) that is nod based on marginalist theory, and a theory of savings/wealth that doesn’t simply assume that savings/wealth are expected future consumption discounted by some (arbitrary) coefficient, are the points of fracture for modern day macroeconomics.