Models and Reality

Linked below is a 95m Video Lecture on the previous post on “Simple Model Explains Complex Keynesian Concepts“. In Chapter 2 of General Theory, Keynes has two points against the classical theory of the labor market. He points out that laborers react strongly (with strikes) against wage cuts, but show no similar reaction to inflation. This means that the decision to supply labor does not depend on the real wage — instead it must depend only on the nominal wage. The SECOND point, which he regards as fundamental, is that the bargain between firms and laborers is conducted in terms of nominal wage — this decision does not determine the real wage. The real wage is an emergent property; it comes out of the system as a result of collective decisions of all, and is not controlled by any two parties. One of the KEY contributions of the SIMPLE MODEL discussed in the previous post, and in the video lecture below, is to show how this works — regardless of how the laborers and landlords negotiate and decide on the nominal wage, the real wage does not change. It is amazing that there is no understanding of this — which Keynes calls the “fundamental point” in the literature on labor economics. Current labor textbooks seem to completely ignore Keynes, and I am not aware of an explication of this anywhere else either [Readers: please provide pointers to clear explanations elsewhere if you know of some]. This can be considered as the main contribution of the simple model explained in the video lecture linked below (and the previous post, linked above).  read more