by A couple of years ago Michel De Vroey felt the urge to write a defense of Robert Lucas’ denial of involuntary unemployment: What explains the difficulty of constructing a theory of involuntary unemployment? Is it, as argued by Lucas, that the “thing” to be explained doesn’t exist, or is it due to some deeply embedded premise of economic theory? My own view tilts towards the latter. Economic theory is concerned with fictitious parables. The premises upon which it is based have the advantage of allowing tractable, rigorous theorising, but the price of this is that important facts of life are excluded from the theoretical universe. Non-chosen outcomes is one of them. The underlying reason lies in the trade technology and information assumptions upon which both the Walrasian
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A couple of years ago Michel De Vroey felt the urge to write a defense of Robert Lucas’ denial of involuntary unemployment:
What explains the difficulty of constructing a theory of involuntary unemployment? Is it, as argued by Lucas, that the “thing” to be explained doesn’t exist, or is it due to some deeply embedded premise of economic theory? My own view tilts towards the latter. Economic theory is concerned with fictitious parables. The premises upon which it is based have the advantage of allowing tractable, rigorous theorising, but the price of this is that important facts of life are excluded from the theoretical universe. Non-chosen outcomes is one of them. The underlying reason lies in the trade technology and information assumptions upon which both the Walrasian and the Marshallian (and the neo-Walrasian and neo-Marshallian) approaches are based. This is a central conclusion of my inquiry: the stumbling block to the introduction of involuntary unemployment lies in the assumptions about trade technology that are usually adopted in economic theory.
Foregoing the involuntary unemployment claim may look like a high price to pay, particularly if it is admitted that good reasons exist for believing in its real world relevance. But would its abandonment really be so dramatic? …
First of all, the elimination of this concept would only affect the theoretical sphere. Drawing conclusions from this sphere about the real world would be a mistake. No jumps should be made from the world of theory to the real world, or vice-versa … The fact that solid arguments can be put forward as to its real world existence is not a sufficient condition to give involuntary unemployment theoretical legitimacy.
I have to admit of being totally unimpressed by this rather defeatist methodological stance. Is it really a feasible methodology for economists to make a sharp divide between theory and reality, and then treat the divide as something recommendable and good? I think not.
Models and theories should — if they are to be of any real interest — have to look to the world. Being able to construct “fictitious parables” or build models of a “credible world,” is not enough. No matter how many convoluted refinements of concepts made in the theory or model, if they do not result in “things” similar to reality in the appropriate respects, such as structure, isomorphism etc, the surrogate system becomes a substitute system — and why should we care about that? Science has to have higher aspirations.
Mainstream economic theory today is in the story-telling business whereby economic theorists create mathematical make-believe analogue models of the target system – usually conceived as the real economic system. This modeling activity is considered useful and essential. Formalistic deductive “Glasperlenspiel” can be very impressive and seductive. But in the realm of science it ought to be considered of little or no value to simply make claims about the theory or model and lose sight of reality. Insisting — like De Vroey — that “no jumps should be made from the world of theory to the real world, or vice-versa” is an untenable methodological position.
In A History of Macroeconomics from Keynes to Lucas and Beyond (CUP 2016) De Vroey basically tells the same misleading and wrong-headed story as in the article mentioned above. He explicitly acknowledges that his assessment of The General Theory ‘follows from this analysis.’ Citing Mankiw and Patinkin, the author criticises Keynes for not having built his analysis on an ‘explicit and complete model’ and therefore was unable to translate his views ‘into a rigorous demonstration.’
Where did Keynes’ unemployment analysis go wrong? To De Vroey the answer seems to be that ‘the notion of involuntary unemployment was not questioned’ and that ‘the fact that unemployment was massive was taken as an indication that it could not be voluntary.’
Does it sound familiar? Well it should! Because this is the standard Chicago New Classical Economics view that never has accepted Keynes’s distinction between voluntary and involuntary unemployment. According to New Classical übereconomist Robert Lucas, an unemployed worker can always instantaneously find some job. No matter how miserable the work options are, “one can always choose to accept them,” according to Lucas:
KLAMER: My taxi driver here is driving a taxi, even though he is an accountant, because he can’t find a job …
LUCAS: I would describe him as a taxi driver [laughing], if what he is doing is driving a taxi.
KLAMER: But a frustrated taxi driver.
LUCAS: Well, we draw these things out of urns, and sometimes we get good draws, sometimes we get bad draws.
In New Classical Economics unemployment is seen as as a kind of leisure that workers optimally select. In the basic DSGE models used by these economists, the labour market is always cleared – responding to a changing interest rate, expected life time incomes, or real wages, the representative agent maximizes the utility function by varying her labour supply, money holding and consumption over time. Most importantly – if the real wage somehow deviates from its “equilibrium value,” the representative agent adjust her labour supply, so that when the real wage is higher than its “equilibrium value,” labour supply is increased, and when the real wage is below its “equilibrium value,” labour supply is decreased.
In this model world, unemployment is always an optimal choice to changes in the labour market conditions. Hence, unemployment is totally voluntary. To be unemployed is something one optimally chooses to be.
It is extremely important to pose the question why mainstream economists choose to work with these kinds of models. It is not a harmless choice based solely on ‘internal’ scientific considerations. It is in fact also, and not to a trivial extent, a conscious choice motivated by ideology.
By employing these models one is actually to a significant degree absolving the structure of market economies from any responsibility in creating unemployment. Focussing on the choices of individuals, the unemployment ‘problem’ is reduced to being an individual ‘problem’, and not something that essentially has to do with the workings of market economies. A conscious methodological choice in this way comes to work as an apologetic device for not addressing or challenging given structures.
Not being able to explain unemployment, these models can’t help us to change the structures and institutions that produce the arguably greatest problem of our society.