Are recessions abnormal ?

by John Quiggin on November 8, 2015

I’m on to the macroeconomics section of my book in progress, Economics in Two Lessons. The key point of this section is that, whereas the academic economics profession has wasted most of the last thirty years on the project of founding macroeconomics on (some near approximation of) standard neoclassical microeconomics, the validity of the core results of neoclassical microeconomics depend on the assumption that the economy is operating at full employment[^1]. This observation isn’t original – it was why Keynes saw his theory as saving capitalism from itself. Even the title I used in this post on the macro foundations of microeconomics turns out to be a reinvention of the wheel.

Having noted the importance of the full employment assumption in the abstract, how relevant is it? If the economy is, with notably rare exceptions, at, or close enough to, full employment, then it seems safe enough for economists to continue, as the profession has for 40 years or so, to treat macroeconomics as a special subfield with little relevance to the rest of the discipline.

To put the question simply, are recessions abnormal?

Are recessions abnormal ?

Much economic discussion is based on the implicit assumption that the ‘normal’ state of the economic or business cycle is one of full employment, and that mass unemployment is a rare exception to this state. On this view of the world, recessions are temporary interruptions to a pattern of stable growth. The pattern of economic activity associated with a ‘typical’ recession is ‘V-shaped’, with two or three quarters of sharp contraction followed by an equally rapid expansion which restores the economy to something close to full employment. The widely-used informal definition of a recession as ‘two quarters of negative growth’ reflects this view.

There have, however, been lengthy periods when the economy has behaved quite differently. In deep depressions, however, such as those following the Wall Street Crash of 1929 and the Global Financial Crisis (GFC) of 2008, the contraction is sharper and the recovery, when it comes, is slow and fragile. Even after years of ‘recovery’ employment remains far below normal levels.

During the Great Depression the ratio of employment to population in the US fell from 55 per cent in 1929 to 42 per cent at the depths of the slump in 1933. Despite the expansionary effects of the New Deal, employment remained weak throughout the 1930s, with the ratio only reaching 47 per cent in 1940.

http://www.u-s-history.com/pages/h1528.html

The same is true the ‘Lesser Depression’, which began with the Global Financial Crisis at the end of 2008 and has continued ever since. The ratio of employment to population in the US fell from 63 per cent to 58.5 per cent at the onset of the GFC. Despite years of ‘recovery’, the ratio has remained at or near that level ever since.

There have also been lengthy periods when recessions were consistently mild, so mild that many observers believed the business cycle to have ceased to operate. The longest such period began with the outbreak of World War II in 1939, and came to an end in the 1970s. This ‘long boom’ began when wartime economic planning mobilised all available economic resources. Most economists expected the economy to decline when the war ended, as had happened after World War I. However, under the influence of Keynesian economics, governments in the decades after World War II were committed to maintaining full employment and did so with substantial success.

The Keynesian system of economic policies ran into difficulties during the late 1960s. The 1970s was a chaotic period of high inflation and periodic high unemployment. In the mid-1980s, the economy began to recover, as the Federal Reserve developed new tools for economic management. Recessions continued to occur, as in 1990 and 2000, but they were relatively brief and mild. By the early 2000s, economists discerned a period of relative stability which was quickly christened ‘The Great Moderation’.

However, the Great Moderation turned out to be an illusion. Whereas the Keynesian long boom had lasted for decades, the Great Moderation was already over by the time it was ‘discovered’. The bursting of the Internet bubble in 2000 marked the end of strong employment growth in the US and much of the developed world. The GFC turned slow growth into sharp decline, followed by stagnation.

Taking these disparate periods into account, can we regard full employment as the normal state of the economy, subject to temporary interruptions associated with downturns in the business cycle? The evidence suggests that we can not.

Before looking at the business cycle, it’s important to observe that, even under the conditions normally described as representing full employment, around 5 per cent of the labour force is unemployed and actively looking for work at any given time. In addition, substantial numbers of workers would like to work longer hours while others would enter the labour force and seek work if they thought such a search would be successful.

In treating such a state as one of full employment, the underlying assumption is that, under these conditions, unemployment arises from difficulties in matching workers with jobs, rather than from a shortage of jobs in aggregate. (This will be addressed later on).

Turning to the cyclical data, the United States was the first country where systematic study of the business cycle was undertaken, and therefore yields a long series of data based on consistent criteria. The National Bureau of Economic Research was set up in the 1920s and has long been the source of official estimates of the start and end dates for recessions in the United States. According to NBER estimates, over the 100-year period since 1914, around 25 years have been spent in recession.

However, this classification is, in critical respects an underestimation. The NBER treats recessions as beginning when the economy starts contracting, and ending when economic growth resumes. This treatment works reasonably well for ‘typical’ ‘V-shaped’ recessions where the recovery phase restores full employment within a few quarters.

In deep Depressions, however, such as those following the Wall Street Crash of 1929 and the Global Financial Crisis (GFC) of 2008, economic weakness persists long after the end of the contraction phase. At least from the perspective of labor markets it would make more sense to treat the recession as continuing until the economy returns to its pre-crisis growth path. In particular, as long as the employment-population ratio is far below its pre-crisis level, implying the existence of large numbers of unemployed or discouraged workers, wages do not properly represent opportunity costs.

To see the implications of this, consider the NBER data separately for the periods before and after 1929. Before 1929, contractions and expansions were about equally long, so that the economy was in recession a little under half the time.

Now, in addition to the NBER data, treat the whole of the Great Depression 1929-39 and the years since the GFC as recessions. On that basis, the US economy has been in recession for about a third of the period since 1929, only a modest improvement on the period 1854-1929.

But even this is an underestimate. The post-1929 average is pulled up by World War II when the government actively worked to ensure that everyone capable of working towards the war effort did so, and by the period of Keynesian macroeconomic management from 1945 to 1970. If these periods are excluded, the proportion of time spent in recession is around 40 per cent.

To sum up, except when governments are actively working to maintain full employment, the economy is in recession almost as often as not. The idea of full employment as the natural state of a market economy is an illusion.

[^1]: Full employment doesn’t mean zero unemployment, since some people are always changing jobs, or are in the process of leaving the labor market. Roughly speaking, the employment is at full employment in the sense required here when any additional job creation in one sector of the economy is feasible only by attracting workers away from other sectors.

{ 48 comments }

1

Omega Centauri 11.09.15 at 12:04 am

I’d say the economic is a complicated dynamical system, and the full employment state/trendline is only one possible solution. A big driver of the dynamics could be considered under the term political-pyschology, which includes instability increasing responses, such as austerity, and the temptation to blow financial bubbles. Large excursions from the full-employment trendline would seem to be normal.
Perhaps proper control policies could tame these instabilities, however the incentives for political actors to exploit general ignorance of this complex subject makes that almost unachievable in practice.

2

tqft9999 11.09.15 at 12:33 am

“until the economy returns to its pre-crisis growth path”
How do you identify and untangle this path in periods of rapid technological change?

If another financial crash happened today, in 2 years time, how many jobs would have been made obsolete, eg by Watson. I know most of my current job is amenable to replacement by a pretty stupid ai. Reading, collating and summarising excel spreadsheets mostly. Yes I am working towards making myself redundant with automation.

3

Anarcissie 11.09.15 at 12:33 am

If we mean by ‘depression’ and ‘recession’ considerably less production, employment, consumption, etc., than are theoretically possible, then I would expect the natural* state of a capitalist economy to be ‘depressed’. Such economies are dynamic and have significant positive-feedback loops which ought to cause blow-ups near maxima and prolong doldrums around minima.

* That is, without strong government intervention, such as that occasioned by major wars.

4

Brett 11.09.15 at 2:05 am

@tqft9999

How do you identify and untangle this path in periods of rapid technological change?

You just turn on the “firehose” of monetary and fiscal stimulus while hoping for the best until you reach full employments. It seems to work – that’s what the Federal Reserve did in the US in the Postwar Period, they did a milder version of it in the 1990s, and so forth. Both of the periods I just mentioned were ones of massive technological change and adoption that expanded some sectors of the economy while erasing others – we just don’t remember a lot of it because most of the people who lost their jobs got soaked up into new ones.

5

Roger Gathman 11.09.15 at 3:21 am

Actually, when economists use the term “full employment”, they are implicitly rejecting employment by the state. In other words, full employment is supposed to be something sustained by private enterprise. But – to use the US as an example – this has never been the case since the great depression. Since WWII, the government has gone from employing about 13 percent of the workforce to close to 17 percent. In 2009, for instance, according to the Bureau of Labor, there are around 22 million Americans employed by local, state and federal governments.

This means, at first glance, that the private sector employs on average about 82-84 percent of the work force. In actuality, given a very rough average of unemployment of 5 percent, which is really generous, the private sector ends up employing closer to 80 percent of the work force.

You can look elsewhere in the developed world and find similar statistics. The first thing one has to say about full employment is that under modern capitalism, it doesn’t ever happen if we rely solely on the private sector. In a sense, the unemployed mass of the Great Depression was dissolved into the state, and has remained there ever since.

6

mclaren 11.09.15 at 4:00 am

The situation may well loom worse than you describe. Larry Summers cites a recent paper he wrote with Olivier Blanchard and Eugenio Cerutti:

Blanchard, Cerutti and I look at a sample of over 100 recessions from industrial countries over the last 50 years and examine their impact on long run output levels in an effort to understand what Blanchard and I had earlier called hysteresis effects. We find that in the vast majority of cases output never returns to previous trends. Indeed there appear to be more cases where recessions reduce the subsequent growth of output than where output returns to trend. In other words, “super hysteresis” — to use Larry Ball’s term — is more frequent than “no hysteresis.” (..)
Standard new Keynesian macroeconomics essentially abstracts away from most of what is important in macroeconomics. To an even greater extent this is true of the DSGE (dynamic stochastic general equilibrium) models that are the workhorse of central bank staffs and much practically oriented academic work.

Why? New Keynesian models imply that stabilization policies cannot affect the average level of output over time and that the only effect policy can have is on the amplitude of economic fluctuations not on the level of output. This assumption is problematic at a number of levels.

First, if stabilization policies cannot effect average levels of employment and output over time they are not nearly as important as if they can. Beginning the study of stabilization with this assumption takes away much of the motivation for doing macroeconomics.

Second, the assumption is close to absurd. It is surely reasonable to assume that better policy could have avoided the Depression or the huge output losses associated with the financial crisis without having shaved off some previous or subsequent peak.

Third, contrary to the now common view that macroeconomics is best understood by studying the stochastic properties of stationary time series, the most important macroeconomic events are in some sense one off. Think of the Depression or the Great Recession or the high inflation of the 1970s.

The problem has always been that it is difficult to beat something with nothing. This may be changing as topics like hysteresis, secular stagnation, and multiple equilibrium are getting more and more attention. As well they should. US output is now about 10 percent below a trend estimated through 2007. If one attributes even half of this figure to the effects of recession and assumes no catch up on this component until 2030 the cost of the financial crisis in the USA is about 1 year’s GDP. And matters are worse in the rest of the industrial world.

Source: “Advanced economies are so sick we need a new way to think about them,” Larry Summers’ blog, 3 November 2015.

7

Dipper 11.09.15 at 7:58 am

conversation with a friend who works at a recruitment agency for manual/low paid workers in the SE of the UK.

1. local person on unemployment benefit turns up. Is offered job. declines it because the slight increase in income isn’t worth dropping out of the benefits system for.
2. Two hungarians turn up from the airport with rucksacks on their back. They are going to rent a room, get a bank account and then are ready to do whatever is requested.

Do we have full employment in the SE of the UK?

8

Bruce Wilder 11.09.15 at 9:03 am

In the world, there can be full employment and unemployment: only states of the world with one of those two properties can actually come about. There can be no such thing as sustained “overemployment” of resources, so whether recessions are “normal” or “abnormal”, it is inevitably going to be the case that periods of full employment will alternate with periods of underemployment, as those are the only two possible states of the world.

This asymmetry in the employment of resources follows from a simple dichotomy: resources are employed or resources are not employed. (The latter, it might be added, allowing for fields lying fallow and resources transitioning from one function or purpose to another, is a clear case of inefficiency.)

9

Bruce Wilder 11.09.15 at 9:06 am

“Standard new Keynesian macroeconomics essentially abstracts away from most of what is important in macroeconomics.” Larry Summers

Being the coordinated effort of thousands of dedicated professionals, one might be excused for suspecting this is a design criteria.

10

Robert Waldmann 11.09.15 at 10:03 am

This post is excellent. It does have an oddly strong focus on the USA. This actually weakens the case. The US is slightly unusual because, since the great depression, it hasn’t suffered a period of persistently high unemployment. Most of Europe suffered persistently extremely high unemployment in the 80s and 90s. There was only a fairly brief period of moderate unemployment soon before the financial crisis.

Here (I’m in Italy) moderate unemployment is abnormal. The normal situation has been unemployment over 8%.

11

Lee A. Arnold 11.09.15 at 10:43 am

Bruce Wilder #9: “… thousands of dedicated professionals…”

Either that, or (contrary to your #9) a severe case of “sustained overemployment”.

12

bob mcmanus 11.09.15 at 12:11 pm

11 & 12 correct Wilder, or one can look to say Krugman and current discussions of Fed policy and “liftoff” from zero interest rates. Along with other indicators, the Fed largely looks to inflation (Phillips curve) and wage increases to determine if the economy is at full employment. “Overemployment” seems to happen often, and is indicated by inflation and wage increases.

Rather ‘full employment’ is an undesirable characteristic of an out-of-control-expansion.

Currently in the US “out-of-control expansion” seems to be a trendline that points to an inflation rate of 2.1%

Underemployment is the primary goal of mainstream economics as a mystified system of political control.

13

Peter T 11.09.15 at 12:17 pm

I was struck by the evidence compiled by Floud, Fogel, Harris and Hong in The Changing Body that around 20 per cent of the populations of Great Britain and France in the C18 and much of the C19 was chronically malnourished, to the point where the authors observe that the only employment they could actually undertake was “a little light begging”. This despite the fact that Britain, and in most years France, produced enough food for everyone. And Britain in this period was close to a market economy – almost everyone worked for wages, few firms had any great degree of market power and the state was small.

The answer is in part that these people were marginal elements in the social structure of the economy. And this area – of the structure of the economy in the sense of the hierarchies, distributions of size and power, ability to command rents or appropriate shares of production – is one where formal economics is very weak. This, it seems to me, is the place to look if you want to know why Italy’s unemployment rate has a higher base than the US, or why some considerable percentage of the population is always unemployed.

14

Bill Benzon 11.09.15 at 12:44 pm

Totally OT – sorry, John – but CT really ought to post something about the linguists revolt against Elsevier. As you no doubt have heard, the entire editorial team of Lingua has quit. They’d proposed that Elsevier make it an open access journal and Elsevier refused. The editorial team will be launching a new open-acess journal called Glossa. Elsevier will try to keep the old title going. It has been suggested that the old journal be known as Zombie Lingua.

This post at Language Log has links and more:

http://languagelog.ldc.upenn.edu/nll/?p=22162#more-22162

15

Lee A. Arnold 11.09.15 at 1:05 pm

I would like to read from Robert Waldmann where he thinks all of this is going.

The good economists have realized that something is seriously wrong and are going at it from different angles: Quiggin wants to inform policy by making the argument that opportunity costs can be followed and accounted. Summers and DeLong are arguing that decades of bubbles have masked a chronic lack of demand, and they have been exploring the various possible causes of that lack, some of which would lead to profound changes, beyond mere course-corrections. P. Romer thinks that growth is lacking because we don’t have a theory that can show the way to make good policy for non-rivalrous ideas. Mian & Sufi and Rogoff all seem to think that the problems will largely go away once that the “debt overhang” has abated. D. Baker appears to think that most of the problem is with the power elite and the weakening of labor. Adair Turner, Obstfeld and others have begun to realize that printing money instead of running budget deficits is the only way out (which is my own conclusion — and I note that Speaker of the US House Paul Ryan just passed a budget that funds highway repairs with money that is “borrowed” from the Fed’s “profits”!) Mark Thoma is doing a truly remarkable job of aggregating all of these ideas at his blog, with occasional syntheses of his own.

Robert, without necessarily commenting on all of this, and in 100 words or less (hah!), what do you think the problem is? and what is the policy path to take?

16

Bruce Wilder 11.09.15 at 1:33 pm

bob mcmanus: Underemployment is the primary goal of mainstream economics as a mystified system of political control.

Indeed, that had been the game since 1970 thru the George W Bush Administration, with Robert Lucas as Grand Master Mystic.

With global resource constraints looming ever larger and a rapid increase in demand for apologia for the rapacious greed of a globalised elite of the super-mega wealthy and their servitors and security guards, economists like Summers see opportunities to branch out into innovative forms of obfuscation and misdirection.

17

Metatone 11.09.15 at 1:50 pm

To add on to many good thoughts here:

1) If you compare the history of Latin American democracies with European ones, it becomes clear that a society (political-economic system) may find an “equilibrium” at an unemployment level far above NAIRU. And the difference seems to be in the power and political relations.

(But always worth pointing out that there is little proof that our economic systems are actually “single equilibrium” and tend naturally towards full employment.)

2) The theory of NAIRU and the way it translates into central banking and other policy seems to mean that even in the good times we spend a lot of time at NAIRU +2%. Which is a lot of unemployed people. There are even worse issues where you get disparities between regions.

18

James Wimberley 11.09.15 at 2:05 pm

mclaren in #6: “First, if stabilization policies cannot effect average levels of employment and output over time they are not nearly as important as if they can. ”

There is a major omission here in political economy: ignoring the long-tail risk of catastrophe. The catastrophe is political, in revolution of left or right. The seizure of power in Russia in 1917 by the Bolsheviks had everything to do with war and little with economic mismanagement. But Hitler’s rise to power was clearly correlated with mass unemployment – the NSDAP was electorally insignificant in 1929. As with climate change, it is extremely unsound to ignore such risks. I doubt if Keynes did.

BTW, the professionally correct course for microeconomists after the publication of the General Theory would have been to look for microeconomic foundations for the new and obviously superior macroeconomics. This has started, with behavioural economics. But the general pattern has been denial. It’s pretty, so it must be true.

There must be precedents in intellectual history for such resistances on aesthetic grounds. It didn’t apply to the end of geocentrism, which by the time it died was a frightful kludge. From the outset Copernicus had the aesthetic advantage, which Kepler converted to a wipeout.

19

William Timberman 11.09.15 at 2:56 pm

Pondering the daunting new tools available to the statusquoistas, and what to do about them politically, I come across news like this:

“First They Came for the Pennies…” in the War on Cash

And on the other side of the ledger (perhaps) this:

The Uberization of Money

I’m not qualified to say whether such things matter much to the big picture being presented in the OP and the comments so far, but they should at least have some nostalgia value for Marxists. Maybe what comes after the bourgeoisie isn’t what Marx thought it would be, but cumulative technological change does seem to be just as powerful an influence as he thought it must be on what does come next.

20

Bruce Wilder 11.09.15 at 3:10 pm

James Wimberly @ 19

Minsky, a student of Schumpeter iirc, took that course; his John Maynard Keynes (1975) did the logical thing: interpret and extend Keynes with a more sophisticated, institutional finance.

Axel Leijonhufvud also did a logical thing: he tried to interpret Keynesian unemployment as a disequilibrium phenomenon and the business cycle as driven by feedback in ways that can create race conditions.

The most illogical thing was what the mainstream did. The very existence of cycles refutes the hypothesis of a general equilibrium of a system of markets in price.

You have to ask, why?

I think the aesthetic answer is a dodge. Wrong is never that pretty.

The problem is political: do macro honestly and you reveal a political struggle over the distribution of wealth and income in a way that threatens those in possession of wealth.

21

Rakesh Bhandari 11.09.15 at 3:14 pm

“But even this is an underestimate. The post-1929 average is pulled up by World War II when the government actively worked to ensure that everyone capable of working towards the war effort did so, and by the period of Keynesian macroeconomic management from 1945 to 1970. If these periods are excluded, the proportion of time spent in recession is around 40 per cent.”
Interesting point. Piketty basically excludes the same time periods to reach the conclusion that over its history the logic of capitalism has been to create a patrimonial society. That is, except in those exceptional periods caused the exogenous shocks of revolution, war and post-war reconstruction, the normal operation of capitalism tends to create a patrimonial capitalism or rentier society.

22

Bruce Wilder 11.09.15 at 3:45 pm

Peter T @ 14

I read Jenny Uglow’s chatty and informative, In These Times recently, about the British home front during the 22 years of war that engulfed the generations that crossed from the 18th to the 19th century. You might enjoy it, but you won’t imagine a minimal state presiding over a simple market economy.

23

MPAVictoria 11.09.15 at 4:46 pm

Off topic but too good not to share with the people who write and comment here

Trolley Madness
http://existentialcomics.com/comic/106

24

SusanC 11.09.15 at 5:08 pm

Ok, so I’m not an economist. But looking at the footnote to the original post, if the definition of “full employment” is that offering higher wages won’t increase the total number of people in work, and we have the usual microenomic supply/price curve for how much you have to offer people to persuade them to work (as opposed to doing something else), then you’ll never have “full employment”. There will always be some small number of people who aren’t currently working but could be persuaded if you offered more money.

Of course, when we talk about unemployment, we usually aren’t referring to the (small number of) people who would need a very large offer to persuade them into the labour market, but a situation where anything paying over minimum wage will increase the total number of people in work.

25

Barry 11.09.15 at 5:45 pm

JQ: “In the mid-1980s, the economy began to recover, as the Federal Reserve developed new tools for economic management. “

Suggested correction: ‘in the mid-1980’s, the Federal Reserve ended a quite deliberate period of crushing the US economy to crush labor, permanently altering the distribution of gains from growth…’.

26

Stephen 11.09.15 at 6:25 pm

Peter T@14: I’ve not read Floud et al, though I may try to: but do they seriously maintain that for much of the C19 around 20% of the population were living by begging?

27

Stephen 11.09.15 at 6:27 pm

Robert Waldman @10: I think that if you look at the Japanese unemployment figures, you will find an even more drastic deviation from the US figures which seem to be regarded as the norm.

28

Roger Gathman 11.09.15 at 7:15 pm

The OECD has published a comparison across countries of the percentage of the work force employed in the public sector. The scandinavian countries rank high – in Denmark, Norway and Sweden, over 30 percent of the workforce works in the public sector. The UK is 21.5 percent in 2015. In Australia, the public sector grew in the past four years – an exception to the OECD norm – to 18.9 percent of the employed population.
I really think the definition of full employment that pegs it to wages, in the economists sense, really doesn’t address the real composition of the labor force. Government does attract people by paying higher wages, but it can also pay low wages in order to absorb unemployed people who are being shut out of the private sector due to lack of demand. Technically, I suppose that you could say that the public sector is “attracting” these people, but I think this buys into the myth of a labor market in which the consumer/vendor, the laborer, confronts a multitude of choices and takes the most advantageous option. I think that is an absurd description of how people actually get employment and remain employed. It is as if you analyzed this sentence that I am writing by saying that it means that my fingers moved x many times over the keys. Until economists stop, as per James Galbraith, modeling employment as a market, they won’t understand it.

29

Bruce Wilder 11.09.15 at 8:16 pm

Stephen @ 27: . . . do they seriously maintain that for much of the C19 around 20% of the population were living by begging?

C0nditions during the first full tide of the Industrial Revolution, in the 1830s and 1840s, were such that they were not living at all. Life expectancy for a laborer in Manchester in the 1840s would not get him out of his teens.

30

Peter K. 11.09.15 at 9:45 pm

Agree with 16. Jared Bernstein wrote that in the U.S.:

“since the late 1970s, we’ve been at full employment only 30 percent of the time (see the data note below for an explanation of how this is measured). For the three decades before that, the job market was at full employment 70 percent of the time.”

31

Roger Gathman 11.09.15 at 9:46 pm

@30 There was a famous study done of heights, such as they could be gathered, of British people from 1750 to 1880 by Floud, Wachter and Gregory. The people measured were mainly male, since the stats come from the army and prison – and some females. With that caveat, the scholars found that height increased from 1750 until 1820, and then dropped radically by 2 inches into the 1840s. They stabilized for twenty years, and started rising again in the 1860s. This is the kind of statistical measure that, if it were shown to be true of the Soviet Union, would be proclaimed as proof positive of the maleficient effects of communism – but as it is true about the most advanced capitalist country of the time, it is attacked as not reflecting the animal spirits and entrepreneurialism of the golden age of classical liberalism.

32

ingrid robeyns 11.09.15 at 10:26 pm

Thanks John, a clear & helpful post. Three questions:

(1) is the unavoidable employment you refer to in the footnote (and once we, I presume, shouldn’t’ be worried about) what is called ‘friction employment’?

(2) what do you think of Tony Atkinson’s proposal (in his recent book “Inequality: what can be done?” that the government should be the employer of last resort (I am not sure that’s his terminology – but basically he means that the government should offer a job to anyone needing one).

(3) is the assumption that markets don’t clear in the long run particularly problematic for labor markets, or also for other markets?

33

Peter T 11.10.15 at 1:15 am

Bruce @23

I don’t imagine any such thing. But if there were ever a “market economy” Britain c1820 is probably as close as it gets.

Stephen @ 27 – no, not all literally begging. Just slowly starving on scraps (gleaning, charity, petty crime….). Dying in cold weather or epidemics or high food prices or periods of elite righteousness… Some escaped into the armed forces, where one at least was fed in return for the beatings.

It’s not hard to see that, absent federal transfers and social security, some significant fraction of the US population would be in the same boat.

Tying back to the o/p – the history is that it is demonstrably not the case that unemployment is a problem of wages, or supply and demand for labour, or overall levels of demand, or “structural adjustment”, although all of these have some effect.

34

Anarcissie 11.10.15 at 2:50 am

Unmodified capitalism would have to produce losers, and many of the losers would continue to lose, until they died. That seems obvious, and we observe it in history. But that isn’t unemployment — it’s death. Until the poor died, they might be fully self-employed, scavenging, begging, stealing, and so on. Even dying usually takes some work.

35

John Quiggin 11.10.15 at 3:20 am

Ingrid @33

(a) It’s frictional unemployment about which we don’t need to worry, and also some structural unemployment (for example, workers with obsolete skills), which is a problem but is specific to labor-markets
(b) I’m generally sympathetic to proposals like this. See my book with John Langmore Work for All, from the 1990s
(c) This problem is most severe for labor markets, and to some extent for the market for physical capital (idle factories in a recession). Only in the initial crisis phase do goods markets commonly fail to clear. We saw this happen in the early months of the global financial crisis, for example, but that phase was over fairly quickly.

36

John Quiggin 11.10.15 at 6:49 am

@10 I’m aiming at a US audience, but I discuss European austerity elsewhere in this chapter, and will add a bit more about it

37

reason 11.10.15 at 10:32 am

From OP
“(some near approximation of) standard neoclassical microeconomics”

Should read “(some crazy approximation of) standard neoclassical microeconomics”.

38

reason 11.10.15 at 10:49 am

Lee Arnold @16
“Adair Turner, Obstfeld and others have begun to realize that printing money instead of running budget deficits is the only way out (which is my own conclusion — ….”

I think picking on one single solution is not quite right. I think the biggest problem is the concentration of wealth, but the best way to tackle that is to
1. tax more
2. redistribute more (especially via a citizen’s dividend – i.e. a basic income)
3. invest more in infrastructure, with the particular target of reducing land prices by providing more good (well connected) places to live. The basic income will help with this by encouraging more people to move to where they can afford rather than where they can find work
4. print more money and create less debt (i.e. your one and only solution).

39

Lee A. Arnold 11.10.15 at 11:39 am

Sorry, I should have made clear that no one believes that it is the exclusive solution, and it’s obvious from reading them that Turner, Obstfeld, and others maintain that there are many other policies that ought to be enacted, and that goes without saying.

But it does not appear as if all of those other things will suffice, to me at least, and what is finally going to be forced upon us all is a change in the understanding of money. circumstances are forcing us to a breakpoint in long psychological transformation. Felix Martin’s book, Money: the Unauthorized Biography, is a good overview of the dimensions of it, and of just how long that change has been aborning. (I think he should issue a 2nd edition and rewrite the final chapter and epilogue without changing the narrative voice.)

I think that Turner’s new book just published, Between Debt and the Devil, is the single clearest and most comprehensive guide to what is happening, from reality to theory and back again, including the role that real estate plays. A remarkable performance, strongly recommended. Epochal really, it should be required reading on course lists.

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reason 11.10.15 at 1:51 pm

Lee A. Arnold @40
Oh by the way I forgot a forgot a big point
Reform IP (might even need to be revolutionise IP). IP is one big mess (particularly but not only in the case of Pharmaceuticals).

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reason 11.10.15 at 2:06 pm

Lee,
thanks for the way for the tip about the (very recent) book. This could be what I have been looking for. I can’t be the only one who thinks “stabilising” the economy by increasing private debt is crazy.

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Stephen 11.10.15 at 7:11 pm

Bruce Wilder@30, Peter T@34: it looks as if we are all agreed that the initial claim thatvFloud et al showed that around 20 per cent of the populations of Great Britain in the C18 and much of the C19 was chronically malnourished, to the point where that the only employment they could actually undertake was “a little light begging” is, shall we say, hyperbolic.

That life expectancy in the chaotic, insanitary conditions of industrial Manchester in the 1830s-40s was poor, no doubt: but irrelevant to the initial question (and life expectancy for everybody in Manchester was bad. It still is.). That many British people in the hungry 40s, and before and afterwards, were malnourished is beyond dispute. That people who could support themselves by gleaning and petty crime lacked the energy to work: come off it.

What you have to consider is that life expectancy in GB as a whole in the Industrial Revolution increased, and that childhood mortality decreased.

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Bruce Wilder 11.10.15 at 8:36 pm

Stephen @ 43

I am not sure what you are on about.

I don’t have to consider that life expectancy in GB “as a whole in the Industrial Revolution increased, and that childhood mortality decreased” because there is no “whole”. It wasn’t all one thing, the trend wasn’t all in one direction, it wasn’t uniform and steady progress for everyone everywhere.

Some part of the population was very severely and adversely affected, and more so in some periods and places than other periods and places. That the life expectancy of a common laborer in British cities in the 1840s was as low as 16 or 17 is hardly made up for by the fact that life expectancy of a middle-class professional in the same cities was 45 or 50.

The situation was better before 1820 and got better again after 1860. As late as WWI, when the physicals given to volunteers and conscripts gave statistical shape to the consequences of accidents, overwork, occupational disease and malnutrition, it was clear that a large part of the British population suffered quite severely from economic progress.

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reason 11.10.15 at 10:14 pm

Stephen @43, Bruce @44
Reports I have read from IR Germany suggests severe malnutrition and disease was also a major issue there. And Stephen, I sort of wonder also what you are talking about. Being able to engage in occasional pilfering is not quite as strenuous as a 10-12 hour day in a factory or down a mine.

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Collin Street 11.10.15 at 11:27 pm

Interesting point. Piketty basically excludes the same time periods to reach the conclusion that over its history the logic of capitalism has been to create a patrimonial society. That is, except in those exceptional periods caused the exogenous shocks of revolution, war and post-war reconstruction, the normal operation of capitalism tends to create a patrimonial capitalism or rentier society.

Revolution and war aren’t the only exogenous shocks that matter: discovering new silver mines in germany or gold mines in australia, or expropriating large quantities of gold in south america, greatly increase the amount of circulating money and acted as an exogenous fiscal shock. Or there’s the black death, or the expropriation of indigenous folk in the americas, africa and oceania: again, exogenous events with huge economic impact.

The basic maths of systems like capitalist economies fairly clearly shows that their only mathematically stable state is what we’d recognise as deep depression: only external shocks can drive it out of that state, and chaotic factors can [==will, over time] drive it back into depression pretty randomly.

[people with lots of money have lots of money because they are averse to spending money: money — resources — which falls into the hands of people who already have lots of money thus becomes sterilised. Only by finding new resources or breaking up and distributing agglomerations of resources can resources circulate.]

I’m sure Piketty wrote a wonderful book, but really it shouldn’t be needed. We don’t have thick tomes on the history of falling, with anecdotals from the tower of babel to hindenberg, to establish the idea that “generally things without support will move towards the centre of the earth”: even aristotle didn’t need that.

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Peter T 11.10.15 at 11:49 pm

Stephen @43, Bruce

We are not just talking about the early stages of the industrial revolution. The history suggests that being undernourished and therefore incapable of earning enough to feed oneself through paid work was a reality for a large chunk of the population before the welfare state. Because the kinds of work available demanded hard physical work and paid too little to afford a healthy diet.

This is not just a problem of capitalism. While we are on relatively firm evidential ground for the last two centuries, there’s a mass of material to point to it arising fairly early on. Which is why one of the earliest roles of the state is to protect the weak from the strong, continually redistribute resources downwards, ensure access for those who would otherwise be excluded.

I don’t expect JQ’s book to delve into this but, if economics wants to actually get at the way things work, it needs to look much more at the way social structures both enable greater production and embed within themselves a continuing issue of distribution.

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Stephen 11.11.15 at 4:22 pm

Bruce Wilder @44, Reason@45. What I am trying to say is that there are differences between these statements which seem to me significant:
1. Childhood mortality in some industrialised regions in the early IR was very high (unarguably true, and undernutrition was a factor).
2. Many who reached adulthood were stunted in their growth through undernutrition when young (equally true).
3. Around 20 per cent of the populations of Great Britain and France in the C18 and much of the C19 was chronically undernourished, to the point where the only employment they could actually undertake was “a little light begging” (not so obviously true, but I’ll have to read Floud et al for further and better particulars).

I entirely agree with Bruce that things which were true for some places at some times were often not true for other places and other times; that’s obvious. How to go from there to “there is no whole”, I cannot say. Since the initial statement was about the populations of Britain and France for well over a century, I thought we were dealing with a fairly substantial whole. And looking at Britain as a whole, is there any doubt that from the early C18 on population increased, life expectancy increased, childhood mortality fell?

Sidecomment: it is claimed http://marginalrevolution.com/marginalrevolution/2015/11/glasgow-fact-of-the-day.html
that in the Calton district of Glasgow, male life expectancy for 1998-2002 was 54: for the Lenzie district in the same city, 82. Not sure that can be explained by undernutrition.

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Peter T 11.14.15 at 12:59 am

maybe dead thread, but I’ll can make the point re nutrition etc clearer. There are plenty of “jobs” out there today in advanced economies which don’t pay enough to feed oneself. The evidence is that this has always been the case.

So if a market doesn’t clear for several centuries, either our understanding of markets is very imperfect, or it isn’t a market. I think it’s the latter, and that therefore analysing it in market terms is a major mistake.

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