Permanent Keynesian Unemployment

hroughout the West, unemployment remains stubbornly high. Unemployment in these European nations ranges from 8.5% in Italy to over 20% in Spain.

For Europe as a whole, the figure is 10.3%. What is revealing is this: ever since 1995, it has been above 9% most of the time. Only in February 2008 did it fall to 7.3%. For workers under age 25, the figures are much worse. A generation of educated college graduates has become a lost generation.

Yet as the chart reveals, a few countries are doing far better. Netherlands, Austria, and Germany have rates from about 4.5% to 6.5%. These are nations noted for their comparative frugality.

For Europe as a whole, it has been 40 years of unemployment. It the 1960s, European employment was high. This changed in the 1970s. Keynesian economists seem baffled by this. Keynesian policies of government deficits were supposed to end unemployment. They haven’t in Europe.

The chart for the United States since 1965 is revealing. The unemployment rate climbs in recessions, then falls into the 4% to 6% range. Not this time. Since 2008, the rate has soared and has refused to come down. Use the interactive chart to select a base year.

All this is to say that the Keynesian system is unable to explain why unemployment should persist. The Keynesian tool kit has been available to national governments. The political leaders are disciples of Keynesianism. Their advisors are Keynesians. Yet the prescription is no longer working. The U.S. government has run three consecutive years of trillion-dollar-plus deficits. They have not worked to bring down the unemployment rate.

This raises a pair of questions. First, with respect to economic theory, why isn’t the policy prescription working? Second, historical: When a theory ceases to explain events, why won’t it be abandoned by a younger generation of theorists?

These two questions faced neo-classical economists in 1936. They could not answer either of them. They lost the war for the minds of the next generations.

KEYNES’ REVOLUTION

In 1936, Macmillan published John Maynard Keynes’ book, The General Theory of Employment, Interest, and Money. The book was an attack on the free market’s ability to clear itself of unsold goods, including “labor goods,” by means of downward price adjustments.

The answer to this issue had been provided two years earlier in a book also published by Macmillan and written by the rising economic star, Lionel Robbins. Its title: The Great Depression. It was written from an Austrian School approach. Robbins had studied informally with Ludwig von Mises in Vienna. Keynes’ question was answered again in 1937 by another book published by Macmillan, Banking and the Business Cycle, by three economists. It also was written from an Austrian outlook. So, the big winner in all this was Macmillan.

Keynes’ book became dominant. Younger economists adopted it. The other two books were forgotten by 1940. Within two decades, the modified Keynesianism of Paul Samuelson was dominant in Anglo-American academia. It remains dominant today.

The heart of Keynes’ thesis is this: downward price flexibility does not clear markets, including the capital goods markets. Classical economics had taught that the competitive pressures of the free market will lead to falling prices and decreased unemployment. The rule was this: “At a lower price, more is demanded.” This includes labor.

The Great Depression by 1936 seemed to refute the classical economists’ theory. Because this theory of causation was central to economics from Adam Smith to the Great Depression, the persisting unemployment seemed to refute this fundamental tenet of free market economic theory. Thus, the profession was waiting for a new theory of free market pricing. Keynes supplied this. The theory was wrong, but it had a ready market.

Keynes recommended what every Western government had been doing since 1930: run deficits. His solution was more of the same: larger deficits and more government employment.

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via Permanent Keynesian Unemployment – GoldSeek.com.

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