recipe book for cooking up a delicious anti-mankiw, chapter on unemployment

I decided to use my teaching job this summer to catch up on some Anti-Mankiw- related ideas. So you can consider these posts to be part-notes part-critique and part-solution as I group some of these ideas into a workable form.

Unemployment: definition, causes, and consequences

What really amazes me about introductory textbooks in economics is their simultaneous acceptance and rejection of politics as having anything to do with the variables in question. For example, when discussing unemployment dynamics, Krugman addresses one of the most compelling questions in economics with the answer that, well, it depends on "the nature of labor markets" (2e, pg. 206). Mankiw is not much different (4e, pg. 622 where the causes of unemployment are almost the same as the ones Krugman advances, though Krugman is less thorough).

The compelling question cited above is simply put in Bowles' Understanding Capitalism: "[o]ne of the hardest things to understand about our economy is the fact that there are often (a) factories lying idle while at the same time (b) a significant number of people are looking for work, and (c) many human needs are not being met" (403).

I want you to seriously think about that for a minute before reading further. Think hard. How would you answer -- is it a natural trilemma? Is there any way to change it? Is it necessarily a bad thing? Leave comments with your ideas!

I don't feel like getting into all the details here, but it's clear that for Krugman and others, it's just about "the nature of labor markets" -- let economists analyze the market forces and how they might be channeled toward more optimal ends.

Such a response is the knee-jerk, fake, and uncritical reaction of one whose worldview is based on a highly simplified and simply wrong model of the labor market.

I'm not sure who is worse on this issue either -- Krugman or Mankiw. Krugman passively presents the "consensus among most economists" (it is a common theme in his text) that collective bargaining and minimum wage legislation cause structural unemployment and therefore interfere with a natural market order (2e, pg. 210). Mankiw at least acknowledges other views, but, for example, refers to the theory of the reserve army as an "old Marxist idea" (4e, pg. 633). Right -- as though the vision of a perfect market order "disturbed" by rigidities such as minimum wage laws were not old.

So, in presenting unemployment and inflation as the two "great evils" of macroeconomics (199), Krugman seems to be accepting some sick variant of the new Keynesian synthesis of the 70s and 80s, forgetting some crucial points along the way: first, macro theory arguably began not with treating the "evils" (???) of unemployment and inflation but rather with Keynes, who in the 1930s focused on how variables such as investment dynamics influence the labor market; second, macro policy founded on the "dual mandate" of price and growth stability is far from a politically neutral category of political economy (Krugman has nice separate pictures of Reagan and Clinton in his unemployment chapter! cute); third, and perhaps my biggest problem with this treatment -- analyzing the labor market as though it were in some kind of temporary disequilibrium.

I hope I don't need to say anything else about the first point (I mean, is this really how history of thought ought to be treated in an intro text? At least get the historical sequence straight if you're going to be superficial). The second point is very relevant given the historical origins of the Federal Reserve as well as the ownership of said institution by a collection of private banks. And, let's not forget, among many other examples, Greenspan's The Age of Turbulence where we get to see in painstaking detail the level of intimacy which characterized his relationship with free market thinkers and ideas during his ten-plus year tenure as Chairman. The third point is addressed by Keynes in Chapter 2 of his General Theory -- that is, it's the whole reason he wrote his book! He argues that breaking the classical postulate concerning the equilibrium character of labor markets is similar to breaking the parallel postulate in Euclidean geometry. Everything explodes. See my own post on this here.

In summary, implicit in both Krugman and Mankiw's first treatment of unemployment in their textbooks is an underlying model which completely separates labor market issues with other factors in the economy. You don't have a job because of high search costs (frictional unemployment) or your skills are relatively high in demand at this point (structural unemployment). Linkages with real macroeconomic dynamics and issues or politics is eschewed.

Proposed alternative discussion

Because no one likes a summary critique without a positive turn on things, it remains to show how these ideas might be collected into a better treatment of the causes and consequences of unemployment. For the moment, let me push aside the -hate part of my love-hate relationship with Keynes and accept the fact that he as well as Marx both made valuable contributions to our study of investment behavior and aggregate demand, and how both of these variables influence unemployment.

The conditions of the business investment climate include class power, future viability of the economy (made almost completely ambiguous by uncertainty), taxes, and pro- or anti-labor governments. The conditions of political dynamics, on the other hand, are based on investment decisions (see my post on the investment theory of politics here) as well as some autonomous factors.

These two spheres of activity -- politics and investment -- feed each other dialectically in an advanced capitalist economy. Both are central for a story of strong economic growth as well as for an understanding of the politics of the business cycle -- bailouts and so on.

These ideas are not hard to swallow. But it does take some time to work out the dynamics because they are certainly complicated. And I really mean they are governed by dialectics. But it should be fun! There are a lot of contemporary connections to make, and as long as it all relates back to how business and politics feed off of each other, I think the "big picture" can be advanced easily.

History is also important here. Yeah yeah... I know I'm always talking about it! But I think it's important to see how the relationship between the state and investors started, it gives students a good sense of how it all started or at least matured. A perfect point of introducing the historical origins of these dialectics is encapsulated in some big-time government-capital moves of the twentieth century: the creation of the Fed and of course, the creation or founding of the Welfare State during the Great Depression. Seeing the politics of these institutions and the original motivations for their invention allows the student to see the ideas of the "great evils" as historically contingent and therefore politically-motivated and not permanent. (By the way, I think using the term "evil" in these contexts, as some economists are wont to do, is disgustingly non-rigorous and politically deaf.)

So, there you have a general outline. If your students want to learn about unemployment, start with the definitions, point out some curious aspects of these definitions such as their reference to equilibrium and complete ignorance of some of the core issues about why unemployment occurs, and then explore how unemployment is influenced, and in turn influences, the political dynamics of investment. Introduce some history to show them that these ideas are contingent on a specific constellation of the political forces -- that way they understand the political non-neutrality of the economic policies as well as some lessons about how they arose in the first place. In this way, they gain an understanding of unemployment that is also informed by the historical, social, and political dimensions of the issue.

Aside from that, the other topics of the unemployment chapters in Krugman and Mankiw definitely need to be addressed, such as job search, collective bargaining, and efficiency wages. But there is no reason why these subjects couldn't be covered in the context of the above dialectical relationship which I outlined. It would just take some work to reframe the issues. For example, there are some great stories connected to Ford's 5$ day and Bismark's welfare model. Use them! (Or email me, and I can suggest some ways to use them.)