The Keynesian Case Against Labor Unions

The argument is, natch, full of econ lingo, so turn your mind back to ol' "Econ 101"….From Canadian economist Nick Rowe:

When we talk about being paid too much, we should always understand this in real terms. What matters is not how many dollars we get paid; it's how much we can buy with those dollars we get paid. It's the relative price, not the nominal price that matters.

Because each individual faces a downward-sloping demand curve, but all individuals together face a horizontal aggregate demand curve, each individual will choose a price that is too high and a quantity that is too low. Because one individual's selling price is another individual's buying price, all would be better off if all cut prices and increased quantity. Prisoner's dilemma. The attempt by each individual to raise his own real income above the competitive equilibrium results in a lower real income for all.

If all prices are sticky, then an expansionary monetary policy, which increases aggregate demand, increases output and makes everyone better off. That's why booms are good, because it brings the economy closer to the competitive equilibrium. And why recessions are bad, because they take the economy further away from the competitive equilibrium.

And cartels, like labour unions, just make the problem worse. Because by joining together with similar sellers into a group, the demand curve facing the group is  steeper than the demand curve facing the individual, since members of the group no longer compete against each other for buyers. So there is an even bigger difference between the downward-sloping trade-off facing the group of sellers and the horizontal trade-off facing us all.

Unions are bad for the very same reason that recessions are bad.

All New Keynesian macroeconomists have understood the above for the last 20 years. Which is why all New Keynesian macroeconomists are fundamentally opposed to cartels, labour unions, minimum wage laws, etc.. OK. It's why they should be opposed to such things.

[Via Tyler Cowen at Marginal Revolution]

Comments

[OhioOrrin]

hate unions...the short version.

[sevo]

ur a dumb shit.
Long and short version.

[Old Mexican]

Yes. Next question?

[Hoser Union]

That's a real nice bag of milk ya got there. Be a real shame something happened to it, eh?

[joshua corning]

All New Keynesian macroeconomists have understood the above for the last 20 years. Which is why all New Keynesian macroeconomists are fundamentally opposed to cartels, labour unions, minimum wage laws, etc.. OK. It's why they should be opposed to such things.

One should note that many if not most Keynesians are actually not Keynesians in the sense that most who talk the talk are not macro-economists whose primary focus is on Keynesian economics. Krugman and De Long are two prime examples of this phenomena.

[hmm]

That's why they coined New Keynesian.

[joshua corning]

That's why they coined New Keynesian.

So New Keynesians are those who do not study or practice or understand Keynesian macroeconomic theory?

I guess Friedman was right.

"We are all (new) Keynesians now."

[hmm]

No, but man do they like to bend and change the rules. It gets kind of comical at times.

[R C Dean]

OK. It's why they should be opposed to such things.

Yet, oddly, we don't seem to see a single Neo-Keynesian opposing unions, minimum wage laws, etc.

Keynesianism, Neo or Paleo, is explicable only as an economic apologia for the State to intervene in and manipulate the economy. I can't think of any other explanation that accounts for all the facts.

[joshua corning]

I can't think of any other explanation that accounts for all the facts.

What? You never heard of religions being bent to the will of its practitioners?

My I direct you to Wikipedia and its entry on "The Crusades".

If that don't work then simply read Friedman. He is a Keynesian Macro-economist who proved much of it wrong by using its own arguments against it.

[Old Mexican]

Oh, man. Pretty much using crackpot economics to explain why unions are bad. That's no way to argue - like saying "Well, unicors are bad but castrated unicors are not, thus unions are bad."

[Old Mexican]

Something wrong with the "n" key there...

[prolefeed]

Racist!

[cynical]

Dammit, first the s's, now the n's.

[G Price]

"Which is why all New Keynesian macroeconomists are fundamentally opposed to cartels, labour unions, minimum wage laws, etc."

How convenient is it that the one cartel not being mentioned is the bank cartel that brought us to this place...not unions.

Demonizing Unions is a political ploy for a well-established bank cartel gov. Period.

I hope everyone watches Inside Job after it's Oscar win last night - it's the only thing not being discussed. Economics doesn't work if economists don't point the finger at the elephant in the room. And it's not just a GOP issue, as the banker buddies in the White House staff will show.

[Pedant]

Another macroeconomist who has not read Kirzner. Trying to discuss market processes with a static equilibrium model will get you nowhere fast.

[prolefeed]

If all prices are sticky, then an expansionary monetary policy, which increases aggregate demand, increases output and makes everyone better off.

Typical Keynesian bullshit. If the government continually debases the currency, prices will quit being sticky because people will take that debasing into account when setting prices.

Debasing the currency HARMS demand, because of the malinvestment and the cost of making adjustments to the slippery currency value.

That's on the order of Teh Stoopid as saying, "If the rich make no changes in their conduct in response to raising marginal tax rates, then we can raise those rates to 100% and haul in a buttload of fresh gov't cash to spend."

[Dave T]

I don't know that all prices are very sticky, but wages certainly are (as evidenced by the massive protests at cutting wages...). But taking your argument into account, that without purely monetary inflation, wage prices would NOT be sticky... do you actually believe that? That people will happily accept wage cuts some years and wage increases others based on FE equilibrium?

Seems unlikely...

[Tncm]

Will they "happily" accept cuts in wages? Of course not, just as businesses don't jump for joy when they have to lower the price of their final goods due to market competition. But this whole business about them being "sticky" is nonsense.

[sevo]

"But this whole business about them being "sticky" is nonsense."

Why so?
I find it a pretty descriptive term for cost movements that trail price signals.

[Sam Grove]

Wages may be sticky, but payrolls, not so much.

[prolefeed]

If my boss tells me, "Business is bad. We're losing money. We have to reduce payroll costs or go out of business. So, you have a choice here -- either take a 10% pay cut, or walk out that door and try to find another employer", and she MEANS it, and I know it, and I don't know any employer who will pay me more than 10% below my current salary, are you saying I will choose to walk out that door and be unemployed because I perceive my wages to be sticky?

Really?

[P Brooks]

If all prices are sticky, then an expansionary monetary policy, which increases aggregate demand, increases output and makes everyone better off.

I read that sentence at least fifteen times, and all I could come up with in response was, "Whuuuu...?"

[Tncm]

"Sticky" is economics lingo for some variable that is very resistant to change. In Keynesian macroeconomics, wage rates and I believe the price of consumers goods are both considered to be very sticky. Keynes believed that in a recession prices and wages would not fall nearly fast enough, or not fall at all, to make the market clear. It also works the other way; Keynesians reject the notion that increases in the money supply cause high levels of inflation.

Aggregate demand is the demand schedule of everyone in an economy at a specific price level. A left-ward shift in aggregate demand causes recessions (people aren't purchasing enough goodies so resources and labor go unused). Keynes believed that recessions were psychological, that they were brought upon by a phenomena called the "animal spirits".

Simply put, Keynes believed that investors were driven in their investment habits entirely by their confidence in the market. Keynes believed that investors would feel either "bullish", that the market is doing great, or "bearish", that the market is doing shitty. It is psychological in the sense that investors reach these emotional conclusions on their own, separate from the market process. As Murray Rothbard put it, Keynesians believe that investors are, in short, schizophrenics.

Hence if investors suddenly feel bearish and pull back on their spending, aggregate demand will shift to the left and, oh noes, recession. Keynes said that at this point the government needed to step in and make up for the fall in the "I" part of the "C+I+G=Y" equation by ratcheting up "G". The government can do this two ways; either through an expansionary money supply, or through increased government expenditures.

The neo-Keynesian that this article is discussing suggests that we solve the aggregate demand problem monetarily. An expansionary money supply is enacted primarily through the central banks's manipulation of interest rates. The central bank will introduce new fiat money into the loan market to depress the gross market interest, and thus will make it more appealing for investors to take out loans and spend it on capital-intensive projects. Austrians believe that this manipulation of interest rates is the cause of the business cycle, but that's a different story for a different day.

Some people above have picked apart how wrong the Keynesian in question is. I could go into why Keynesian macro and micro economics is horribly flawed, but entire books have been written on the subject. Needless to say, Keynes is one of the few economists outside of Marx to be consistently wrong in nearly every proclamation and supposed "discovery" that he's ever made. Orthodox Keynesianism has largely been abandoned in favor of New Keynesianism, which I believe has dropped all of the animal spirits nonsense. I'm not really experienced with neo-Keynesianism, so someone else will have to fill you in on that. The fall of Keynes has allowed for, rightly or wrongly, the rise of monetarism and real-expectations economics (and even some Austrians, too).

[Tncm]

Heck, just watch this video: http://www.youtube.com/watch?v=d0nERTFo-Sk

[Juice]

But how will you prevent cartels or other sorts of collusion at the level of "management" or "capital" or whatever?

You can abolish union-supporting labor laws, but you'll also have to strictly enforce anti-trust laws, and that just doesn't happen.

So if you want your economics to work well for everyone, what's supposed to happen? Open and honest competition among individual actors with high integrity? Well, ok.

[sevo]

Juice|2.28.11 @ 6:58PM|#
"But how will you prevent cartels or other sorts of collusion at the level of "management" or "capital" or whatever?"

"You" don't have to prevent them; they fall apart on their own since capitalists aren't any more the "New Soviet Man" than are those who work for them. Read some history, for pete's sake.
.....................................

"You can abolish union-supporting labor laws, but you'll also have to strictly enforce anti-trust
laws, and that just doesn't happen."

Non-sequitur.
................................
"So if you want your economics to work well for everyone, what's supposed to happen? Open and honest competition among individual actors with high integrity? Well, ok."

No high integrity required; self-interest will suffice.

[Scott]

He is right about minimum wage laws, at least...

[prolefeed]

Minimum wages are completely sticky for individuals. For the entire payroll of individuals employed at minimum wage at a given company? Not so much so.

[prolefeed]

Or more precisely, under minimum wage laws, wages at the minimum level are initially very sticky, but subject to abrupt slippages of 100%.