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You don't seem to know what Keynesian economics is. Please google it. Other key phrases include "sticky wages". If you think I'm wrong, please show how to use

You don't seem to know what Keynesian economics is. Please google it. Other key phrases include "sticky wages". If you think I'm wrong, please show how to use a Keynesian theory to predict "real wages fell by 40% but employment dropped". Good luck.

notahacker 11y ago
The problem is that a huge swathe of mainstream and formerly mainstream macroeconomic viewpoints are classed as "Keynesian", and the mainstream "New Keynesian" macroeconomic model you speak of which focuses on manipulating inflation to overcome resistance to real wage cuts and assumes a minimal role for fiscal policy is rather different from the traditional "Keynesian" (and "Post Keynesian") emphasis on increasing net government spend to stimulate consumption in a downturn. Pretty much any undergrad who's read their introduction to national accounts and Keynesian concept of aggregate demand and multipliers can devise a set of simultaneous equations which will yield both a real wage fall and an unemployment rise in a basic stylised macro model if you also slash G and raise T (especially if the assumption is - as with Greece - that the expected debt servicing will largely be repatriated to overseas bondholders)
yequalsx 11y ago
I have the same suggestion for you. Google it.
crdoconnor 11y ago
>You don't seem to know what Keynesian economics is. I'm really not the one who is confused here :) >If you think I'm wrong, please show how to use a Keynesian theory to predict "real wages fell by 40% but employment dropped". Good luck. Simple. Reduce aggregate demand enough (e.g. by slashing government spending like Greece has done) and employment and real wages will both drop. It's neoclassical economics with its idiotic presumption of 'full employment by default' that can't account for real wages and employment dropping at the same time. According to that theory, wages will just keep dropping until everybody is employed.
- yummyfajitas 11y ago
  Step 1: Reduce aggregate demand enough (e.g. by slashing government spending like Greece has done) and Step 2: ??? Step 3: employment and real wages will both drop. How do you fill in step 2? Remember, I asked if you could show how Keynesian theory predicts this, not assert that it does.
  - JamesBarney 11y ago
    Aggregate demand is the quantity of all goods demanded in the economy. 1. Aggregate demand drops. This shifts the curve to the left. These leads to a drop in the price and quantity of goods exchanged in the economy. 2. If firms are producing less goods they need less workers to produce these goods. 3. If they need less workers, the demand for workers shifts to the left. 4. This means the price and quantity of workers drops(wage cuts and increased unemployment) Price and wage stickiness is one tool that New Keynesian economists use to try to explain business cycles using microfoundations. Keynesians don't need it they use other routes to explain why aggregate demand exists(Pigou's wealth effect, Keynes interest rate effect, and the Mundell-Fleming exchange-rate effect). The downside to the Keynesian approach is the Lucas critique[0]. That relationships based on historical data are vulnerable to change when monetary policy changes. This started the New Keynesian/NeoClassical/Keynesian dvision. [0] - https://en.wikipedia.org/wiki/Lucas_critique https://en.wikipedia.org/wiki/Lucas_critique
    - yummyfajitas 11y ago
      Aggregate demand is not a quantity, it's a relationship between output and price level. But anyway, following your story, you get reduced employment. But you don't get involuntary unemployment - people employed at a price $P as well as people unemployed but willing to accept work at the same price. All your story gives us is that there is a new market clearing price for labor at a lower price level, e.g. $P2 < $P. Fewer people are willing to accept labor at $P2, so they voluntarily go without work. This is pretty much just basic supply&demand. You don't even need to go as far as Keynesian theory to get this out. If this is Varoufakis' story, it's hardly clear why he is criticizing classical econ 101 at all.
JamesBarney 11y ago
Its not Keynesian theory but basic economics. Imagine demand for labor dropped, and supply stayed the same.(demand shifted to the left) Assuming that labor demand is downward sloping this would mean price and quantity demanded would both fall.

notahacker 11y ago

The problem is that a huge swathe of mainstream and formerly mainstream macroeconomic viewpoints are classed as "Keynesian", and the mainstream "New Keynesian" macroeconomic model you speak of which focuses on manipulating inflation to overcome resistance to real wage cuts and assumes a minimal role for fiscal policy is rather different from the traditional "Keynesian" (and "Post Keynesian") emphasis on increasing net government spend to stimulate consumption in a downturn. Pretty much any undergrad who's read their introduction to national accounts and Keynesian concept of aggregate demand and multipliers can devise a set of simultaneous equations which will yield both a real wage fall and an unemployment rise in a basic stylised macro model if you also slash G and raise T (especially if the assumption is - as with Greece - that the expected debt servicing will largely be repatriated to overseas bondholders)

yequalsx 11y ago

I have the same suggestion for you. Google it.

crdoconnor 11y ago

>You don't seem to know what Keynesian economics is. I'm really not the one who is confused here :) >If you think I'm wrong, please show how to use a Keynesian theory to predict "real wages fell by 40% but employment dropped". Good luck. Simple. Reduce aggregate demand enough (e.g. by slashing government spending like Greece has done) and employment and real wages will both drop. It's neoclassical economics with its idiotic presumption of 'full employment by default' that can't account for real wages and employment dropping at the same time. According to that theory, wages will just keep dropping until everybody is employed.

yummyfajitas 11y ago
Step 1: Reduce aggregate demand enough (e.g. by slashing government spending like Greece has done) and Step 2: ??? Step 3: employment and real wages will both drop. How do you fill in step 2? Remember, I asked if you could show how Keynesian theory predicts this, not assert that it does.
- JamesBarney 11y ago
  Aggregate demand is the quantity of all goods demanded in the economy. 1. Aggregate demand drops. This shifts the curve to the left. These leads to a drop in the price and quantity of goods exchanged in the economy. 2. If firms are producing less goods they need less workers to produce these goods. 3. If they need less workers, the demand for workers shifts to the left. 4. This means the price and quantity of workers drops(wage cuts and increased unemployment) Price and wage stickiness is one tool that New Keynesian economists use to try to explain business cycles using microfoundations. Keynesians don't need it they use other routes to explain why aggregate demand exists(Pigou's wealth effect, Keynes interest rate effect, and the Mundell-Fleming exchange-rate effect). The downside to the Keynesian approach is the Lucas critique[0]. That relationships based on historical data are vulnerable to change when monetary policy changes. This started the New Keynesian/NeoClassical/Keynesian dvision. [0] - https://en.wikipedia.org/wiki/Lucas_critique https://en.wikipedia.org/wiki/Lucas_critique
  - yummyfajitas 11y ago
    Aggregate demand is not a quantity, it's a relationship between output and price level. But anyway, following your story, you get reduced employment. But you don't get involuntary unemployment - people employed at a price $P as well as people unemployed but willing to accept work at the same price. All your story gives us is that there is a new market clearing price for labor at a lower price level, e.g. $P2 < $P. Fewer people are willing to accept labor at $P2, so they voluntarily go without work. This is pretty much just basic supply&demand. You don't even need to go as far as Keynesian theory to get this out. If this is Varoufakis' story, it's hardly clear why he is criticizing classical econ 101 at all.

JamesBarney 11y ago

Its not Keynesian theory but basic economics. Imagine demand for labor dropped, and supply stayed the same.(demand shifted to the left) Assuming that labor demand is downward sloping this would mean price and quantity demanded would both fall.