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October 28, 2008



Hayek came close in his "The Use of Knowledge in Society." HT to Dave Henderson of Econolog, the only Hayek paper I have read.

Hayek keeps the required assumption; quantized choices done with economy to keep the goods flow.

Hayek missed that the economy of adjustments implied a compact structure, which, due to its compactness, will occasionally requires costly reordering.

Keynes accepted the integral approximation to aggregate measurements, ignoring quantized adjustments. Hence, Keynes theory results in accumulation of errors over time, as indicated by the equity premium puzzle.

Luis Enrique

"The capitalist economy is incapable of providing lasting job security for ordinary people."

Or, evidently, for bankers.

Is any economic system capable of providing "lasting job security for ordinary people"? whatever that means? We know that socialist states have claimed to achieve full employment, but really only achieved hidden unemployment, and job 'security' that was more like a job sentence.

I'm not sure I follow Kalecki's argument about the social status of bosses, but his observation: "Under a regime of permanent full employment, the sack would cease to play its role as a disciplinary measure" is, as you know, the 'efficiency wage' argument, which suggests that worker effort would fall under full employment - what would the consequence of that be? Lower productivity, lower real wage.

How would any form of economic organization that actually achieved "lasting job security" also achieve "creative destruction" or respond to changing terms of trade?

You seem to be presenting the (probable) impossibility of full employment under a capitalist system as a peculiar and undesirable characteristic of capitalism, but it's not clear that it's undesirable or peculiar to capitalism.

(a distinction probably needs making between long-term unemployment and frictional unemployment - even under capitalism, we ought to want to and be able to minimize the former, even if we have to accept the latter)

Tristan Mills

Under a regime of permanent full employment, the sack would cease to play its role as a disciplinary measure. The social position of the boss would be undermined and the self-assurance of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension.

Kevin Carson has claimed that Clinton's administration deliberately raised unemployment for this very reason (in 'The Iron Fist Behind The Invisible Hand' IIRC).


Bizarrely, contrary to Tim's assertion the evidence from peer-reviewed studies is that infrastructure spending is in fact a better stimulant than tax cuts.

Throw in that bringing forward existing products doesn't change the allocation of resources in a huge way and that one sector we know is suffering a large employment downturn is construction... and it's hard to see why we're all treating Ruth Lea et al as though they are some kind of oracle...


Further... quite why we're discussing the dangers of full employment at the present moment I'm not sure... after all we're not near it and we're about to get further away.

Finally, for consistency's sake... what does this say to those supporters of a national minimum income?

Luis Enrique

"Under a regime of permanent full employment ... the social position of the boss would be undermined"

So as unemployment falls, the 'social position' of bosses falls? Does anybody think the social status of bosses is positively correlated with unemployment? Are we about to see bosses rise in social status?

Bob B

Arguably, the sanest comment on this issue was made several decades back:

"The cover of Time magazine in December 1965 quoted Milton Friedman saying: 'We are all Keynesians now.' Friedman later said he had been misrepresented by selective quotation, but the point held good. Charles L. Schultze, then US budget director, felt able to tell Time: 'We can’t prevent every little wiggle in the economic cycle, but we now can prevent a major slide.'”

We don't as yet know how deep the emerging global downturn will turn out to be - which is why it's plain silly to rule out boosting public spending now, apparently regardless of how events may unfold.

For all the points made in the letter by "leading" economists, there are eminently sensible projects which, in principle, could be brought forward in any rational assessment of policy options of what to do in the face of a deepening and/or long recession - such as Crossrail, the upgrading of the railways and London underground as well as a start on building the new generation of powerstations needed to fill the generation gap that will be left when legacy nuclear power stations come out of service c. 2020.

The trouble is that the New Labour governments have been notoriously bad at managing public works programmes at the best of times - such as upgrading the railways and the London underground and the dithering over building new powerstations.

"Almost two-thirds of the early waves of school rebuilding projects in England are behind schedule" [13 October] - and that when construction industry output is at the lowest ebb for many decades.

Whatever happened to that splendid idea of an e-university to upgrade workforce skills?

"A failed government scheme to offer UK university courses online has been branded a 'disgraceful waste' by MPs. The e-University was scrapped last year [2004], having attracted only 900 students at a cost of £50m. Chief executive John Beaumont was paid a bonus of £44,914, despite a failure to bring in private sector backers. The Commons education select committee called this 'morally indefensible' but the government said the e-University project had 'improved understanding'."

The keynesian tradition is sceptical for sound empirical reasons about the effectiveness of cuts in taxes and interest rates to boost demand - likening these policy options to "pushing on a piece of string". The Bush administration hasn't been tardy about cutting taxes by billions - mainly for the benefit of the rich - and we are where we are.


“Under a regime of permanent full employment, the sack would cease to play its role as a disciplinary measure.”

Whenever someone leaves a job, for whatever reason, this imposes a cost on the former employee, who must now find a new job, and on the former employer, who must now find a replacement (unless the employee is retiring, or the job unnecessary).

If these costs are low, neither party has much power over the other. If high, each party has power over the other. Whichever party faces a high replacement cost is to some extent in the power of the other.

So in a perfectly efficient labour market – nobody has any power!

(Notice, incidentally, that the same conditions that give power to “bosses” also give power to union bosses.)


"It’s no accident that"
In the good old days this was Pravda's favourite phrase!

Bob B

By way of innovative public works programmes, how about a splendid new national database of personal medical records on computer to boost NHS efficiency? Patricia Hewitt as health minister already thought of that brilliant idea? In today's news in the FT:

"Progress on the £12bn computer programme designed to give doctors instant access to patients' records across the country has virtually ground to a halt, raising questions about whether the world's biggest civil information technology project will ever be finished.

"Connecting for Health, the ambitious plan to give every patient a comprehensive electronic record, has faced a series of problems over its size and complexity since it was first launched in 2002.

"In May this year, the National Audit Office said the project was running at least four years late but still appeared 'feasible'.

"Since then, however, just one of the scores of acute care hospitals due to install the underlying administration system required in order for the patient record to work has done so. The hospital, Royal Free NHS Trust in London, continues to have difficulties getting it to operate properly. . . "

Will Patricia Hewitt ever get surcharged for the grotesque waste of taxpayers' money?


Ironically, a lot of the probs of public infrastructure spending and projects were due to trying to avoid the Govt debt to GDP ratio growing too big!

And so fragmented ways of keeping new schools, railways etc off the govts balance sheet led to fragmented ways of implementing capital projects!

I'm all for infrastructure upgrades - what about roads though? UK has one of the lowest road capacities per head amongst OECD countries.

We've got such a crap record on Transport in the UK here...

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