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September 7, 2009
As we know few economists saw our current global crisis coming, but this predictive failure was outweighed by the economic profession’s blindness to the very possibility of catastrophic failures in a market economy.
A quote from Paul Krugman's recent article How Did Economists Get It So Wrong? in the New York Times Magazine:
Economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system. If the profession is to redeem itself, it will have to reconcile itself to a less alluring vision — that of a market economy that has many virtues but that is also shot through with flaws and frictions.
The model of a perfect, frictionless market system is a myth, or a fairy tale, given the global financial crisis. The neo-classical model (eg, the Chicago School), which is based on the assumptions that everyone is rational and markets work perfectly, is characterised by its utter failure to make sense of the greatest economic crisis in three generations.
If you start from the axioms that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable. As some neo-classical economists do. They reframe the Great Depression as the Great Vacation. Unemployment is high they reason because many workers are choosing not to take jobs.Something has to give when you reach this level of absurdity and end up in a cul de sac.
I mention this because David Burchell in his op-ed in The Australian---An economist's laugh, but joke's on us reduces Keynes to satirical sallies:
we're all still living in the shadow of Keynes's high-spirited, if malicious, economic humour. It was, after all, an elaborate joke on his part to present every other economist in the world as being in the thrall of something called the "classical" economic view, a view according to which, if we were to believe Keynes, all was for the best in this best of all economic worlds, even in the pit of the Great Depression...By the same token, Keynes was toying with us when he suggested that, so foolish and obdurate were classical economists in their refusal to stimulate demand, even as their world collapsed around them, that literally any kind of expenditure would be a better bet than the precepts of economic policy...In practice, a good deal of the fiscal stimulus doled out across the Western world over the past 12 months has followed Keynes's light-hearted spirit.
What Burchill fails to acknowledge is that the neo-classical view of capitalism as a near perfect economic system wasn’t sustainable in the face of mass unemployment. However, as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market is sustainable in the face of the global financial crisis, which indicates that the economy’s market system can undergo sudden, unpredictable crashes.
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Well Australia is still living with that level of absurdity with the ABC News today crowing about the rise in [internet] job advertisements noted by the ANZ job index. Its a seriously unreliable measure of employment demand because
1. internet job advertisements are cheap
2. organisations advertise jobs they have no intention of filling - they want to maintain their establishment figure so they advertise the job and say no suitable applicant found
3. eg Telstra wants to hire 5 systems architects so they ask their 5 labour hire companies to look for candidates, each company places an ad so you think there are 25 places for systems architects
4. other labour hire companies place ads looking for systems architects because if a hot one walks through the door they might be able to supply the person to Telstra
5. positions are advertised that labour hire companies intend to fill with 457 visa holders - so no domestic candidate will be good enough
A far better measure of jobs is counting the number of positions filled. The Australian Computer Society did this in 2005 and discovered that more graduates were being churned out than there were positions filled by full time, part time, contractors. The survey was stopped and the next society president owns a labour hire company.
I believe the unemployment rate is much higher than the official rate and many unemployed live desperate lives struggling to survive on Newstart facing a hostile media that blames their shiftless, laziness and incompetence for the unemployment.
While there is a low unemployment rate society does not demand government develop employment programs.