Welcome to The Weekend Quiz. This is the 714th edition of the quiz which was first launched on Saturday, March 21, 2009. It is also the final quiz that I will be hosting on this blog. The quiz will reappear soon at – MMTed – where you will be able to access the database at…
The 714th and Final Weekend Quiz – December 31, 2022 – answers and discussion
Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.
From the perspective of Modern Monetary Theory (MMT) he is correct, excessive real wages growth can trigger mass unemployment.
The answer is True.
In this blog post – What causes mass unemployment? (January 11, 2010 )- I outline the way aggregate demand failures causes of mass unemployment and use a simple two person economy to demonstrate the point.
I also presented the famous Keynes versus the Classics debate about the role of real wage cuts in stimulating employment that was well rehearsed during the Great Depression.
The debate was multi-dimensioned but the role of wage flexibility was a key aspect. In the classical model of employment determination, which remains the basis of mainstream textbook analysis, cuts in the nominal wage will increase employment because it is considered they will reduce the real wage.
The mainstream textbook model assumes that economies produce under the constraint of the so-called diminishing marginal product of labour. So adding an extra worker will reduce productivity because they assume the available capital that workers get to use is fixed in the short-run.
This assertion which does not stack up in the real world, yields the downward sloping marginal product of labour (the contribution of the last worker to production) relationship in the textbook model. Then profit maximising firms set the marginal product equal to the real wage to determine their employment decisions.
They do this because the marginal product is what the last worker produces (at the margin) and the real wage is what the worker costs in real terms to hire.
So when they have screwed the last bit of production out of the last worker hired and it equals the real wage, they have thus made “real gains” on all previous workers employed and cannot do any better – hence, they are said to have maximised profits.
Labour demand is thus inverse to the real wage. As the real wage rises, employment falls in this model because the marginal product falls with employment.
The simplest version is that labour supply in the mainstream model (and complex versions don’t add anything anyway) says that households equate the marginal disutility of work (the slope of the labour supply function) with the real wage (indicating the opportunity cost of leisure) to determine their utility maximising labour supply.
So in plain English, it is assumed that workers hate work and but like leisure (non-work). They will only go to work to get an income and the higher the real wage the more work they will supply because for each hour of labour supplied their prospective income is higher. Again, this conception is arbitrary and not consistent with countless empirical studies which show the total labour supply is more or less invariant to movements in the real wage.
Other more complex variations of the mainstream model depict labour supply functions with both non-zero real wage elasticities and, consistent with recent real business cycle analysis, sensitivity to the real interest rate. All ridiculous. Ignore them!
In the mainstream model, labour market clearing – that is when all firms who want to hire someone can find a worker to hire and all workers who want to work can find sufficient work – requires that the real wage equals the marginal product of labour. The real wage will change to ensure that this is maintained at all times thus providing the classical model with continuous full employment. So anything that prevents this from happening (government regulations) will create unemployment.
If a worker is “unemployed” then it must mean they desire a real wage that is excessive in relation to their productivity. The other way the mainstream characterise this is that the worker values leisure greater than income (work).
The equilibrium employment levels thus determine via the technological state of the economy (productivity function) the equilibrium (or full employment) level of aggregate supply of real output. So once all the labour markets are cleared the total level of output that is produced (determined by the productivity levels) will equal total output or GDP.
It was of particular significance for Keynes that the classical explanation for real output determination did not depend on the aggregate demand for it at all.
He argued that firms will not produce output that they do not think they will sell. So for him, total supply of GDP must be determined by aggregate demand (which he called effective demand – spending plans backed by a willingness to impart cash).
In the General Theory, Keynes questioned whether wage reductions could be readily achieved and was sceptical that, even if they could, employment would rise.
The adverse consequences for the effective demand for output were his principal concern.
So Keynes proposed the revolutionary idea (at the time) that employment was determined by effective monetary demand for output. Since there was no reason why the total demand for output would necessarily correspond to full employment, involuntary unemployment was likely.
Keynes revived Marx’s earlier works on effective demand (although he didn’t acknowledge that in his work – being anti-Marxist). What determined effective demand? There were two major elements: the consumption demand of households, and the investment demands of business.
So demand for aggregate output determined production levels which in turn determined total employment.
Keynes model reversed the classical causality in the macroeconomy. Demand determined output. Production levels then determined employment based on the current level of productivity. The labour market is then constrained by this level of employment demand. At the current money wage level, the level of unemployment (supply minus demand) is then determined. The firms will not expand employment unless the aggregate constraint is relaxed.
Keynes also argued that in a recession, the real wage might not fall because workers bargain for money or nominal wages, not real wages. The act of dropping money wages across the board would also reduce aggregate demand and prices would also fall. So there was no guarantee that real wages (the ratio of wages to prices) would therefore fall. They may rise or stay about the same.
Falling prices might, however, depress business profit expectations and so cut into demand for investment. This would actually reduce the demand for workers and prevent total employment from rising. The system interacts with itself, and an equilibrium of full employment cannot be achieved within the labour market.
Keynes also claimed that in a recession it should be clear that the problem is not that the real wage is too high, but rather that the prices are too low (as prices fall with lower production).
However, in Keynes’ analysis, attempting to cut real wages by cutting nominal wages would be resisted by the workers because they will not promote higher employment or output and also would imperil their ability to service their nominal contractual commitments (like mortgages). The argument is that workers will tolerate a fall in real wages brought about by prices rising faster than nominal wages because, within limits, they can still pay their nominal contractual obligations (by cutting back on other expenditure).
A more subtle point argued by Keynes is that wage cut resistance may be beneficial because of the distribution of income implications. If real wages fall, the share of real output claimed by the owners of capital (or non-labour fixed inputs) rises. Assuming such ownership is concentrated in a few hands, capitalists can be expected to have a higher propensity to save than the working class.
If so, aggregate saving from real output will increase and aggregate demand will fall further setting off a second round of oversupply of output and job losses.
It is also important to differentiate what happens if a firm lowers its wage level against what happens in the whole economy does the same. This relates to the so-called interdependence of demand and supply curves.
The mainstream model claims that the two sides of the market are independent so that a supply shift will not cause the demand side of the market to shift. So in this context, if a firm can lower its money wage rates it would not expect a major fall in the demand for its products because its workforce are a small proportion of total employment and their incomes are a small proportion of total demand.
If so, the firm can reduce its prices and may enjoy rising demand for its output and hence put more workers on. So the demand and supply of output are independent.
However there are solid reasons why firms will not want to behave like this. They get the reputation of being a capricious employer and will struggle to retain labour when the economy improves. Further, worker morale will fall and with it productivity. Other pathologies such as increased absenteeism etc would accompany this sort of firm behaviour.
But if the whole economy takes a wage cut, then while wage are a cost on the supply side they are an income on the demand side. So a cut in wages may reduce supply costs but also will reduce demand for output. In this case the aggregate demand and supply are interdependent and this violates the mainstream depiction.
This argument demonstrates one of the famous fallacies of composition in mainstream theory. That is, policies that might work at the micro (firm/sector) level will not generalise to work at the macroeconomic level.
There was much more to the Keynes versus the Classics debate but the general idea is as presented.
MMT integrates the insights of Keynes and others into a broader monetary framework. But the essential point is that mass unemployment is a macroeconomic phenomenon and trying to manipulate wage levels (relative to prices) will only change output and employment at the macroeconomic level if changes in demand are achieved as saving desires of the non-government sector respond.
It is highly unlikely for all the reasons noted that cutting real wages will reduce the non-government desire to save.
MMT tells us that the introduction of state money (the currency issued by the government) introduces the possibility of unemployment. There is no unemployment in non-monetary economies. As a background to this discussion you might like to read this blog – Functional finance and modern monetary theory .
MMT shows that taxation functions to promote offers from private individuals to government of goods and services in return for the necessary funds to extinguish the tax liabilities.
So taxation is a way that the government can elicit resources from the non-government sector because the latter have to get $s to pay their tax bills. Where else can they get the $s unless the government spends them on goods and services provided by the non-government sector?
A sovereign government is never revenue constrained and so taxation is not required to “finance” public spending. The mainstream economists conceive of taxation as providing revenue to the government which it requires in order to spend. In fact, the reverse is the truth.
Government spending provides revenue to the non-government sector which then allows them to extinguish their taxation liabilities. So the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending.
It follows that the imposition of the taxation liability creates a demand for the government currency in the non-government sector which allows the government to pursue its economic and social policy program.
The non-government sector will seek to sell goods and services (including labour) to the government sector to get the currency (derived from the government spending) in order to extinguish its tax obligations to government as long as the tax regime is legally enforceable. Under these circumstances, the non-government sector will always accept government money because it is the means to get the $s necessary to pay the taxes due.
This insight allows us to see another dimension of taxation which is lost in mainstream economic analysis. Given that the non-government sector requires fiat currency to pay its taxation liabilities, in the first instance, the imposition of taxes (without a concomitant injection of spending) by design creates unemployment (people seeking paid work) in the non-government sector.
The unemployed or idle non-government resources can then be utilised through demand injections via government spending which amounts to a transfer of real goods and services from the non-government to the government sector.
In turn, this transfer facilitates the government’s socio-economics program. While real resources are transferred from the non-government sector in the form of goods and services that are purchased by government, the motivation to supply these resources is sourced back to the need to acquire fiat currency to extinguish the tax liabilities.
Further, while real resources are transferred, the taxation provides no additional financial capacity to the government of issue.
Conceptualising the relationship between the government and non-government sectors in this way makes it clear that it is government spending that provides the paid work which eliminates the unemployment created by the taxes.
So it is now possible to see why mass unemployment arises. It is the introduction of State Money (defined as government taxing and spending) into a non-monetary economy that raises the spectre of involuntary unemployment.
As a matter of accounting, for aggregate output to be sold, total spending must equal the total income generated in production (whether actual income generated in production is fully spent or not in each period).
Involuntary unemployment is idle labour offered for sale with no buyers at current prices (wages). Unemployment occurs when the private sector, in aggregate, desires to earn the monetary unit of account through the offer of labour but doesn’t desire to spend all it earns, other things equal.
As a result, involuntary inventory accumulation among sellers of goods and services translates into decreased output and employment.
In this situation, nominal (or real) wage cuts per se do not clear the labour market, unless those cuts somehow eliminate the private sector desire to net save, and thereby increase spending.
So we are now seeing that at a macroeconomic level, manipulating wage levels (or rates of growth) would not seem to be an effective strategy to solve mass unemployment.
MMT then concludes that mass unemployment occurs when net government spending is too low.
To recap: The purpose of State Money is to facilitate the movement of real goods and services from the non-government (largely private) sector to the government (public) domain.
Government achieves this transfer by first levying a tax, which creates a notional demand for its currency of issue.
To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency. This includes, of-course, the offer of labour by the unemployed.
The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.
This analysis also sets the limits on government spending. It is clear that government spending has to be sufficient to allow taxes to be paid. In addition, net government spending is required to meet the private desire to save (accumulate net financial assets).
It is also clear that if the Government doesn’t spend enough to cover taxes and the non-government sector’s desire to save the manifestation of this deficiency will be unemployment.
Keynesians have used the term demand-deficient unemployment. In MMT, the basis of this deficiency is at all times inadequate net government spending, given the private spending (saving) decisions in force at any particular time.
Shift in private spending certainly lead to job losses but the persistent of these job losses is all down to inadequate net government spending.
But in terms of the question – after all that – it is clear that excessive real wages could impinge on the rate of profit that the capitalists desired and if they translate that into a cut back in investment then aggregate demand might fall. Note: this explanation has nothing to do with the standard mainstream textbook explanation. It is totally consistent with MMT and the Keynesian story – output and employment is determined by aggregate demand and anything that impacts adversely on the latter will undermine employment.
The following blog posts may be of further interest to you:
- Functional finance and modern monetary theory
- What causes mass unemployment?
- Modern monetary theory in an open economy
- Deficit spending 101 – Part 1
- Deficit spending 101 – Part 2
- Deficit spending 101 – Part 3
A government desires to reduce the unemployment rate over the next year and gears its macroeconomic policy to maintaining trend real GDP growth, which is 3.5 per cent per annum. If we know that labour productivity is growing at 2 per cent per annum, the labour force is growing at 1.5 per cent per annum, and the average working week is constant in hours, will the government succeed in its aim assuming real GDP is sustained at the trend?
The answer is No.
The facts were:
- Real GDP growth to be maintained at its trend growth rate of 3.5 per cent annum.
- Labour productivity growth (that is, growth in real output per person employed) growing at 2 per cent per annum. So as this grows less employment in required per unit of output.
- The labour force is growing by 1.5 per cent per annum. Growth in the labour force adds to the employment that has to be generated for unemployment to stay constant (or fall).
- The average working week is constant in hours. So firms are not making hours adjustments up or down with their existing workforce. Hours adjustments alter the relationship between real GDP growth and persons employed.
Of-course, the trend rate of real GDP growth doesn’t relate to the labour market in any direct way. The late Arthur Okun is famous (among other things) for estimating the relationship that links the percentage deviation in real GDP growth from potential to the percentage change in the unemployment rate – the so-called Okun’s Law.
The algebra underlying this law can be manipulated to estimate the evolution of the unemployment rate based on real output forecasts.
From Okun, we can relate the major output and labour-force aggregates to form expectations about changes in the aggregate unemployment rate based on output growth rates. A series of accounting identities underpins Okun’s Law and helps us, in part, to understand why unemployment rates have risen.
Take the following output accounting statement:
(1) Y = LP*(1-UR)LH
where Y is real GDP, LP is labour productivity in persons (that is, real output per unit of labour), H is the average number of hours worked per period, UR is the aggregate unemployment rate, and L is the labour-force. So (1-UR) is the employment rate, by definition.
Equation (1) just tells us the obvious – that total output produced in a period is equal to total labour input [(1-UR)LH] times the amount of output each unit of labour input produces (LP).
Using some simple calculus you can convert Equation (1) into an approximate dynamic equation expressing percentage growth rates, which in turn, provides a simple benchmark to estimate, for given labour-force and labour productivity growth rates, the increase in output required to achieve a desired unemployment rate.
Accordingly, with small letters indicating percentage growth rates and assuming that the average number of hours worked per period is more or less constant, we get:
(2) y = lp + (1 – ur) + lf
Re-arranging Equation (2) to express it in a way that allows us to achieve our aim (re-arranging just means taking and adding things to both sides of the equation):
(3) ur = 1 + lp + lf – y
Equation (3) provides the approximate rule of thumb – if the unemployment rate is to remain constant, the rate of real output growth must equal the rate of growth in the labour-force plus the growth rate in labour productivity.
It is an approximate relationship because cyclical movements in labour productivity (changes in hoarding) and the labour-force participation rates can modify the relationships in the short-run.
But it provides reasonable estimates of what happens when real output changes.
The sum of labour force and productivity growth rates is referred to as the required real GDP growth rate – required to keep the unemployment rate constant.
Remember that labour productivity growth (real GDP per person employed) reduces the need for labour for a given real GDP growth rate while labour force growth adds workers that have to be accommodated for by the real GDP growth (for a given productivity growth rate).
So in the example, the required real GDP growth rate is 3.5 per cent per annum and even if policy initiatives achieve that rate of growth, the nation’s output gap would remain at zero.
Which means that while that will be sufficient to maintain the current unemployment rate, it will not generate enough employment to reduce the rate.
The following blog post may be of further interest to you:
A sovereign national government can run a balanced fiscal position over the economic cycle (peak to peak) as long as it accepts that after all the spending adjustments are exhausted in each period of the cycle, that the private domestic balance will equal the external balance on average.
The answer is True.
Note that this question begs the question as to how the economy might get into this situation that I have described using the sectoral balances framework. But whatever behavioural forces were at play, the sectoral balances all have to sum to zero. Once you understand that, then deduction leads to the correct answer.
To refresh your memory the sectoral balances are derived as follows. The basic income-expenditure model in macroeconomics can be viewed in (at least) two ways: (a) from the perspective of the sources of spending; and (b) from the perspective of the uses of the income produced. Bringing these two perspectives (of the same thing) together generates the sectoral balances.
From the sources perspective we write:
GDP = C + I + G + (X – M)
which says that total national income (GDP) is the sum of total final consumption spending (C), total private investment (I), total government spending (G) and net exports (X – M).
Expression (1) tells us that total income in the economy per period will be exactly equal to total spending from all sources of expenditure.
We also have to acknowledge that financial balances of the sectors are impacted by net government taxes (T) which includes all taxes and transfer and interest payments (the latter are not counted independently in the expenditure Expression (1)).
Further, as noted above the trade account is only one aspect of the financial flows between the domestic economy and the external sector. we have to include net external income flows (FNI).
Adding in the net external income flows (FNI) to Expression (2) for GDP we get the familiar gross national product or gross national income measure (GNP):
(2) GNP = C + I + G + (X – M) + FNI
To render this approach into the sectoral balances form, we subtract total taxes and transfers (T) from both sides of Expression (3) to get:
(3) GNP – T = C + I + G + (X – M) + FNI – T
Now we can collect the terms by arranging them according to the three sectoral balances:
(4) (GNP – C – T) – I = (G – T) + (X – M + FNI)
The the terms in Expression (4) are relatively easy to understand now.
The term (GNP – C – T) represents total income less the amount consumed less the amount paid to government in taxes (taking into account transfers coming the other way). In other words, it represents private domestic saving.
The left-hand side of Equation (4), (GNP – C – T) – I, thus is the overall saving of the private domestic sector, which is distinct from total household saving denoted by the term (GNP – C – T).
In other words, the left-hand side of Equation (4) is the private domestic financial balance and if it is positive then the sector is spending less than its total income and if it is negative the sector is spending more than it total income.
The term (G – T) is the government financial balance and is in deficit if government spending (G) is greater than government tax revenue minus transfers (T), and in surplus if the balance is negative.
Finally, the other right-hand side term (X – M + FNI) is the external financial balance, commonly known as the current account balance (CAB). It is in surplus if positive and deficit if negative.
In English we could say that:
The private financial balance equals the sum of the government financial balance plus the current account balance.
We can re-write Expression (6) in this way to get the sectoral balances equation:
(5) (S – I) = (G – T) + CAB
which is interpreted as meaning that government sector deficits (G – T > 0) and current account surpluses (CAB > 0) generate national income and net financial assets for the private domestic sector.
Conversely, government surpluses (G – T < 0) and current account deficits (CAB < 0) reduce national income and undermine the capacity of the private domestic sector to add financial assets.
Expression (5) can also be written as:
(6) [(S – I) – CAB] = (G – T)
where the term on the left-hand side [(S – I) – CAB] is the non-government sector financial balance and is of equal and opposite sign to the government financial balance.
This is the familiar MMT statement that a government sector deficit (surplus) is equal dollar-for-dollar to the non-government sector surplus (deficit).
The sectoral balances equation says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)) plus net income transfers.
All these relationships (equations) hold as a matter of accounting and not matters of opinion.
To help us answer the specific question posed, the following Table shows a stylised economic cycle with some simplifications. The economy is running a fiscal surplus in the first three periods (but declining) and then increasing deficits. Over the entire cycle the balanced fiscal rule would be achieved as the fiscal balances average to zero. So the deficits are covered by fully offsetting surpluses over the cycle.
The simplification is the constant external deficit (that is, no cyclical sensitivity) of 2 per cent of GDP over the entire cycle. You can then see what the private domestic balance is doing clearly. When the fiscal balance is in surplus, the private domestic balance is in deficit. The larger the fiscal surplus the larger the private domestic deficit for a given external deficit.
As the fiscal outcome moves into deficit, the private domestic balance approaches balance and then finally in Period 6, the fiscal deficit is large enough (3 per cent of GDP) to offset the demand-draining external deficit (2 per cent of GDP) and so the private domestic sector can save overall.
The fiscal deficits are underpinning spending and allowing income growth to be sufficient to generate savings greater than investment in the private domestic sector.
On average over the cycle, under these conditions (balanced public fiscal outcome) the private domestic deficit exactly equals the external deficit. As a result over the course of the economic cycle, the private domestic sector becomes increasingly indebted.
|Sectoral Balance||Interpretation of Result||Period 1||Period 2||Period 3||Period 4||Period 5||Period 6||Average|
|External Balance (X – M)||Deficit is negative||-2||-2||-2||-2||-2||-2||-2|
|Fiscal Balance (G – T)||Deficit is positive||-3||-2||-1||1||2||3||0|
|Private Domestic Balance (S – I)||Deficit is negative||-5||-4||-3||-1||0||1||-2|
The following blog posts may be of further interest to you:
- Barnaby, better to walk before we run
- Stock-flow consistent macro models
- Norway and sectoral balances
- The OECD is at it again!
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.
This Post Has 6 Comments
Dear Bill, I will very much miss the weekend quiz. I want to thank you for providing it for years. I found it to be a really good way to learn MMT principles and often would search the past quiz answers when I had questions about either mainstream economics or MMT, because an excellent explanation of both was always in the answers. I also enjoyed the occasional discussion that ensued when someone (often me) disagreed with your answer for some reason.
Is there a chance that you could continue to provide just at least the answers and discussion part of the quiz on your new platform? Maybe on Sunday? It really is a fantastic way to learn.
I am, of course, disappointed that not one of my disagreements with the answers was ever deemed to be correct. It was a goal for a long time that maybe Bill might once say something like ‘You know Jerry, you have a point there’. Best I managed was an admission that English is an international language and that perhaps that obscured the meaning of one particular question depending on how the language was understood in different places…
Oh well. It appears I have one last chance to change your mind about an answer. And I will take that chance because I have disagreed with your answers to variants of Question #1 for a long time. For all that I will miss the Quiz, I will not miss this question at all. But I will wait until I read your answer more carefully before I tell you why I think you are wrong.
So first, the idea that real wage ‘growth’ might be ‘excessive’ is very problematic, and speculative, all by itself. Maybe you could provide an example of a country where across all industries real wages grew excessively and that resulted in some mass unemployment of the population? Because I can’t think of one, But whatever.
Perhaps I should ask what would constitute ‘non-excessive’ wage growth? I assume this would be increases only in line with increases in labor productivity? Assuming the very neoliberal idea that the market has already determined the correct wage level and proper distribution between labor and capital? Sure.
From your answer-“Keynesians have used the term demand-deficient unemployment. In MMT, the basis of this deficiency is at all times inadequate net government spending, given the private spending (saving) decisions in force at any particular time.
Shift in private spending certainly lead to job losses but the persistent of these job losses is all down to inadequate net government spending.”
Stick with your answer! It is a better way to understand ‘mass unemployment’ than unsupported ideas that investors might go on strike if their businesses have too many paying customers. (You might want to modify it to include pandemics though)
If you wanted to argue that central bankers will see real wage growth as threatening, and therefore drive-up interest rates, and choke sectors of the economy dependent upon credit, and therefore cause unemployment- well that might be a better argument about how real wage gains could cause unemployment.
But central bankers are part of the government after all.
Dear Jerry, after reading what you are trying to say, I cannot really understand but for what
is worth and for the last time before the existing blog is moved to another platform, I guess with a new/better format, you mentioned ‘excessive wages growth’ is none observable really. I cannot think of one either but I can think of a similar situation, say, Cuba, a country that has a lot of natural resources and talented people but still has wide spread suffering due to shortage of supply even the simplest products for daily consumptions. State money became worthless due to government policy/ideology promising many things like decent wages, good standard of living, and etc. But these have never been materialized, due to no real substance to support it, or the demand. Would this be an example of excessive wages growth? Another similar situation is Venezuela, or even Weimar Republic, similar situations, increasing wage, pay, salary, in effects government handouts without increasing supply due to whatever reasons war, failed crops, poor farmland management etc.
Another point I want to share from reading the answer to question 1 is that idle labor is one that cannot clear the market at that particular moment in time, and someone has to step in and who could that be at the macro level? Government perhaps?
But say that in that same particular moment time, many companies and the government decided to give 3-5 months bonuses to their employees in a highly functioning markets, would that lead to high unemployment? I doubt it but on the contrary, influx of foreign workers might result.
All the best for the New year!
Dear Vorapot, thank you for your reply! And Happy New Year to you also!
I realize my criticism of Bill’s answer for question #1 might be difficult to understand just by itself, but the situation is, that this question, or close variants of it, has appeared in the quiz many times and I did not want to reiterate all of my previous objections to it again.
So, to me, Bill’s argument here that high real wages will cause ‘Mass Unemployment’ rests on an assumption that investors will withdraw their investment spending if they, as a group, determine that they won’t make enough profit. Sort of like when workers in a union decide to withhold their labor in a labor strike. But there is no explanation given as to why workers having higher incomes results in capitalists not being able to sell their products at some profit margin. Their customers have more money so they are going to buy more product is my thinking.
But perhaps a business produces a product that is only exported, so it doesn’t at all rely on domestic demand? I guess in that case we might see a decline in investment spending in that industry in that country. Which could lead to temporary unemployment for workers in that industry in that country. But that does not mean ‘mass unemployment’ across most economies.
My problem with Bill’s answer is that Bill gives too little credence to the first 95% of his very well crafted argument about what might cause ‘mass unemployment’. He nails the answer in the first 20 paragraphs- at all times, MMT considers an incidence of ‘mass unemployment’ to be a situation of inadequate demand that can eventually be attributed to flawed government policy. And Bill, as always, makes a very, very good case for this.
But then he throws his whole great argument away in a single two sentence paragraph at the very end! And it is ridiculous that there is no mention that maybe government investment might replace private investment if such a situation arose? How does some imagined union of investors going on strike absolve the government of ultimate responsibility for mass unemployment as defined by MMT?? It doesn’t!
…..But then he throws his whole great argument away in a single two sentence paragraph at the very end!
Many thanks for your elaborations Jerry. Now, I can understand better.
This is what I like about bill blog! He allows critiques, alternative viewpoints, ideas, concepts and debates, Knowledge gets push forward everyday here with sound theoretical foundations and coupled with evidence based supports. it is a very dynamic, lively, fun and intellectually fulfilling place to be.
As a free-time exercise, l would ask you – if you were to look back into histories as well as theories, models, or arguments’ being proposed on mass unemployment over the years and the available evidences during the same time period up to the present day, would you still hold the view or come to a conclusion that mass unemployment is ‘clearly’ a null hypothesis in the MMT world?
Meaning, that mass unemployment problem or ‘phenomenon’ doesn’t exit in the MMT realm (or in a way, the floating exchange rate), unless by choice, but only in the fixed ones, which implies that it is just a problem of sectoral balance sheet mismanagement?
Well, there was the recent pandemic where we saw mass unemployment for a time. And that can not be explained by anything MMT (or Keynes) says about inadequate demand. Although it was most certainly NOT caused by excessive real wage demands by workers.
But aside from the hopefully rare pandemics or other truly exogenous disasters, MMT seems to say that excess unemployment is a policy choice that the government always has options to eliminate if it wants to. And Bill says that all the time- except in this one particular quiz question. And I am not willing to accept the two-sentence declaration that he provides as evidence as adequate in the face of his years of work establishing the exact opposite. In my view, Bill has been right, but stubbornly refuses to admit it in this circumstance for some reason that is not explained.
Looking at U.S. economic history between 1900 and 2019, incidences of high unemployment all fall into the category of inadequate demand that could have been resolved by government increasing its own demand for goods and services when private sector demand was lacking. I can’t see a time when ‘excess real wages’ caused mass unemployment. I have asked Bill to provide at least an example of excess real wages causing ‘mass unemployment’ in some country somewhere, but I don’t think that situation has ever existed.