Arnold Kling  

Hayek and Tobin

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High income and Wealth... Vouchers and Education...

Referring to Hayek's Competition as a Discovery Procedure, Brad DeLong wrote,


this particular essay combines brilliance and antibrilliance in remarkable degrees...The second half wanders off into Hayekian hobbyhorses that I don't think are very helpful.

I wish that DeLong would elaborate on his concerns. Hayek says,

A completely rigid wage structure is therefore liable to lead to a gradual decrease in the level of real wages at which full employment can be realized...
The most important task at present appears to be convincing labor as a whole that removing the protection of the relative position of individual groups not only does not threaten the prospects for a rapid increase in the real wages of labor as a whole, but in fact enhances those prospects.

Hayek is saying that rigidity of relative wages impedes economic adjustment, which would mean that economic shocks would tend to cause unemployment. It seems to me that Tobin would say the same thing a few years later in his Presidential Address to the American Economic Association on inflation and unemployment. Tobin argued that inflation would produce changes in the relative wage structure.

It seems to me that both Tobin and Hayek would begin their analysis of recent economic performance in the United States with the boom-bust cycle in the stock market. Tobin of course would refer to q, his ratio of stock prices to the replacement cost of capital.

It seems to me that both Tobin and Hayek would locate the cause of persistent unemployment in the rigidity of relative wages. The web advertising salespersons, "business development executives," and other souvenirs of the dotcom amusement ride have yet to mark their wage demands down to market. The result is the jobless recovery (see this econopundit post), which would better be called the high-output recession. That is, I would say that the economy is basically in recession mode, but output is still growing because of a secular rise in productivity.

Although Hayek and Tobin would disagree about the cure, it is interesting that they might agree about the diagnosis of today's macroeconomic environment. I would not go so far as to endorse the second half of Hayek's essay, but I think that "antibrilliance" is a bit strong.

UPDATE 7-31. Other recent discussion of the relationship between Austrian and Keynesian macro can be found on Brad DeLong's site, Crooked Timber, The Volokh Conspiracy, and Roger Garrison's web site (link from PrestoPundit).

For Discussion. If the story of a boom-bust cycle and wage rigidity fits the current situation, what is the best policy cure?


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COMMENTS (3 to date)
Brad DeLong writes:

Well, there's the typical blah-blah-blah about how "social justice" is an incoherent and a dangerous concept (which Hayek, somehow, believes is an argument against progressive social insurance systems). And then there's the focus on nominal wage rigidity as the key market failure responsible for the destructive aspects of the business cycle. That seems to me to be simply false. As Daniel Davies wrote: "The effect of nominal wage stickiness is a very small part of what’s bad about deflation. What’s bad about deflation is that most debt contracts are denominated in nominal terms, so their real value increases when there is deflation. This can quite easily lead to a situation in which the debt cannot be serviced because the real burden has grown too great, leading to financial dislocation as productive enterprises are broken up to satisfy their nominal contracts. Furthermore, in a falling price environment, there is an incentive to postpone purchases of capital assets, which reduces investment and therefore reduces demand (the multiplier effect). Real wage effects are small in comparison."

Arnold Kling writes:

Brad wrote, "And then there's the focus on nominal wage rigidity as the key market failure responsible for the destructive aspects of the business cycle. That seems to me to be simply false."

I would agree. But nominal wage rigidity dominated the academic discussion quite a bit. Moreover, in the U.S. today, I think that a case can be made that wage rigidity is a major factor in the current business cycle. For example, one of the sectors that is experiencing contraction--the state and local government sector--is one in which wages happen to be particularly sticky.

David Thomson writes:

“Well, there's the typical blah-blah-blah about how "social justice" is an incoherent and a dangerous concept (which Hayek, somehow, believes is an argument against progressive social insurance systems). “

The overwhelming evidence indicates that Hayek was indeed right to consider “social justice" as “an incoherent and a dangerous concept.” Those deemed needing the state to address their “social justice” issues are inevitably perceived as mere victims. They are rarely, if ever, to be considered possibly at fault for their own troubles.

I have no problem with our laws mandating overtime pay, the protection of teenagers in the workplace, and providing workers the right to strike. Still, we are getting into perilous territory when we begin to perceive the government as the first resort to address such issues instead of the very last. Does anyone really believe that Social Security should have been a government program? Wouldn’t we now be far better off if this social challenge would have been left to the private sector to resolve? I’m convinced that Friedrich Hayek’s warnings look darn good in hindsight.

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