Keynes on employment1
There are always winners and losers – that is almost like a saying. Take the example of the Keystone Pipeline. President Biden just shut it down because he wants to develop other sources of energy. So, to win a job in alternative energies, somebody needs to lose their job in carbon-based energy.
This is not a market outcome. It is the consequence of a policy. There is, in this case, the difference between private and social costs because of the existence or not of pollution, thus the shutdown to minimise social costs. But, without the shutdown, there would have been fewer jobs in green energy. This, of course, is not the end of the story. Because there very well may have been more jobs in e.g., the health services due to higher pollution. As well as other changes in employment in other segments of the labour market. So, there is a difference between the specific and the generalised consequences, which is to say, in the jargon, between the partial and the general equilibrium.
The saying’s claim is that for there to be winners, people getting employed, there will have to be losers, people who are unemployed.
The claim has two plus one implications:
First, whenever somebody gets a job, somebody else loses a job (it does not have to be one for one).
Second, full employment is impossible.
And in addition, the job market is always efficient being always at a Pareto optimum. I will put this one aside in this note.
The exception, it might be maintained, to the alleged trade-off is when the state intervenes and employs (i.e., compensates with alternative employment) all the losers who are willing to work without unintended negative effects on overall employment. That might be one understanding of Keynes’ theory of employment.
Keynes in fact did not argue that way. One could, classically or neoclassically, argue that the end of full employment being reached or sustained, so that there are only winners and no losers, depends on the price of labour, i.e., on the wages. If the wages are right, or rather are flexible, and adjust up or down depending on the changing labour market, full employment should be assured. The dynamics, i.e., the adjustment to full employment may differ from case to case, as employers and employees search for each other, but there are no definite winners and losers. Or, rather, there is no equilibrium with unemployment. That, of course, was also not Keynes’ argument.
Marx, indeed, argued that the reserve army of unemployed labour determines wages, pins them to the subsistence level, so there is no full employment, or rather there is always a certain level of unemployment. This is not necessarily different from Ricardo’s argument that wages are determined through changing demographics; the reserve army of labour appearing in the next generation. Full employment in the current generation is accompanied by losers in the next generation as demographics adjust. So, again, there is no full employment without losers.
Keynes assumed that the market wage rate is set to compensate for the disutility of labour and its stickiness is not in itself the reason for involuntary unemployment that he was interested in. Keynes indeed argued that declining wages may very well add to unemployment due to the decline in the overall demand. He assumed that wages were just right for full voluntary employment to achieve generality for his theory, not because he necessarily thought that it is descriptive of the actual labour market.
To see his point, consider the implicit assumption that makes the claim that there are always winners and losers in the labour market apparently convincing. If a firm needs a fixed number of workers, perhaps in order to turn up profit or mark-up, and perhaps because it has some monopoly power, then if an additional worker is to get employed, one of the employed workers needs to lose their job. That is of course not the case if the business is expanding. Conversely, if there are unemployed people seeking work for the given wage, there should be an investment opportunity which will increase overall employment even with monopolistic competition. And there are no winners and losers. The same applies to an industry or to a sector and to the whole economy.
The argument applies to immigration or growing population too. Also, to cross-border investments, though Keynes’ theory of foreign trade and investment may suggest otherwise (see my “Keynes on The Transfer Problem”). Often those who advocate protectionism also believe that there are always winners and losers and the protective measures should keep the losers on the other side of the border while supporting winners on our side of the border (“my country first, thus my job first” type of nationalism). That was not Keynes’ claim and indeed he did not take that to be the Mercantilists’ argument, which he thought was not altogether without merit at least in its motivation (which was, according to Keynes, to keep the domestic interest rate at the level conducive to investment and employment).
As there are not necessarily winners and losers in an expanding economy, the problem of involuntary unemployment then has to be with the expansion of investment. And that is the issue of the interest rate. It should adjust i.e., decline, in order to support additional investment which will increase the demand for labour all the way to full employment. If the interest rate does not adjust, then the available jobs will fall short of full employment. So, for someone to get employed, someone else has to become unemployed. In other words, at some given, misaligned, interest rate there is an equilibrium in the labour market without full employment or with involuntary unemployment. In which case the labour market will remain stuck as long as the interest rate is misaligned and sticky.2
And then if monetary policy cannot push the interest rate down, public investment which is not sensitive to the interest rate is the way to full employment. So, there is no need for winners in the labour market to be coupled with losers in that market.3 That is not to say that policy interventions of all kinds, including those that increase public employment, might not have negative employment consequences, some intended some not.
The saying that there are always winners and losers does not make sense.
Peščanik.net, 06.03.2021.
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- Back in 1969, I translated Keynes’ essay The End of Laissez-Faire (1926) for the journal Ideje which I started that year. The translation was, I am sure, though I have no access to it where I am now, inadequate because Keynes is not easy to translate. In any case, I reread the essay recently and was surprised that much of what is in that piece, is not to be found in The General Theory. The reason, I think, is that Keynes was searching for a general theory while the 1926 address, as that is what it was, speaks to specific issues which are not treated in The General Theory. In his later work, he looked to justify policy interventions given the laissez-faire economy, while in 1926 he argued for policies which are appropriate for an economy in which laissez-faire has died. His enduring distaste for socialism is present both in the essay and in the book. The argument in the essay is more interesting because his main point is that the laissez-faire era is over because of the increased socialization of production due to the separation of management from ownership in big corporations, a theme that does not feature much in The General Theory. But socialists he found to be misguided followers of Bentham and the utilitarian policies which he thought were inadequate for post-laissez-faire economies. His rejection of utilitarianism is also at the bottom of his theory of probability to which he stuck in The General Theory even though he accepted Ramsey’s fundamental criticism. At about the same time when the essay was written he went to Russia and was impressed by the ideological and political determination of its then leaders (that was Bukharin’s Russia then) but thought poorly of their economics. All the pieces can be found in his Essays in Persuasion.
- That is a counterfactual so one needs to be careful about it. One has to think about it in hypothetical, i.e., prospective terms rather than in historical causal terms. Which is almost like saying that one needs to think of it as a policy problem rather than as a market problem: “If we do this” rather than “Had the interest rate been.”
- For animal spirits and liquidity theory of interest see my Five Easy Pieces on Keynes.
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