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Comment by yummyfajitas | Hacker News Reader

This interview is almost incoherent.

Note the contradiction: "no involuntary unemployment and, indeed, no money" followed by "real wages fell by 40% but employment dropped".

The latter statement only contradicts Keynesian economics, which don't have relative prices (Keynesian economics has only real and nominal dollars of GDP) and uses money combined with sticky prices to explain involuntary unemployment.

But although in one sentence he seems to think the Greek experience contradicts Keynesian economics, he turns around and appeals to Keynesian economics a few minutes later: "the 3.5% primary target for 2018 would depress growth today".

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Actually, Keynes called his book General Theory precisely because it included unemployment, in the context of Keynesian economics usually called the output gap. So "no involuntary unemployment and, indeed, no money" is a insult from a Keynesian against neo-classic models.

Second, "real wages fell by 40% but employment dropped," this is precisely what a Keynesian expects. The core insight of Keynesian economics is, that the employees are also the consumers, so that falling prices lead to falling demand.

No, Keynesian economics proposes that high real wages are what cause unemployment - if an employee's real output drops but his real wage stays flat, he might become unprofitable to employ. Since nominal wages are the real sticky quantity, Keynesians propose inflation as a sneaky way to reduce the employee's real wages.

Usually Keynsian economics is understood as economic thought that is based on aggregate demand, this is for example the view Wikipedia takes. [1] From there it is straightforward to argue that higher wages lead to higher employment, a view that makes Keynsian economics popular on the left.

The view, that too high wages cause unemployment, is a staple of supply side economics, the view that the economic process is driven by the supply side.

Krugman argues a lot about sticky wages recently, but not because this is a central tenet of Keneysian economics. Krugmann argues about sticky wages because it is a good argument against the troika's handling of the Greek crisis, since the internal adjustment in the Euro area would either mean inflation in Germany or deflation in Greece.

[1] https://en.wikipedia.org/wiki/Keynesian_economics

Did you read the article on wikipedia? Start from the heading "Concept".

https://en.wikipedia.org/wiki/Keynesian_economics#Concept

Supply side economics is not based on wage levels at all, but rather based on tax-based disincentives to employment and investment.

https://en.wikipedia.org/wiki/Supply-side_economics

> Note the contradiction: "no involuntary unemployment and, indeed, no money" followed by "real wages fell by 40% but employment dropped".

That contradiction quickly dissolves once you see that he first he talks about macroeconomics as taught in the university ("no involuntary unemployment and, indeed, no money") and then about microeconomics ("real wages fell by 40% but employment dropped").

It's still nonsense. Macro does discuss involuntary unemployment and money. Also, the specific microeconomic phenomenon he discusses is exactly the microfoundation for a specific macro theory (Keynesian economics).

>The latter statement only contradicts Keynesian economics

Uh, no, it contradicts neoclassical economics. Keynesian economics views unemployment as a deficit of aggregate demand and most CERTAINLY does not pretend that it doesn't exist.

>But although in one sentence he seems to think the Greek experience contradicts Keynesian economics

A quick skim suggests he doesn't contradict Keynesian economists.

Probably he contradicts new keynesian economics somewhere, but then again, New Keynesian is an abortion that would have Keynes turning in his grave.

According to Keynesians, if real wages fall, employment should rise (relative to a counterfactual of fixed real wages). According to Varoufakis, "real wages fell by 40% but employment dropped" which is the exact opposite of Keynesian economics. Another phrase for "Keynesian economics" is "macroeconomic models taught at the best universities", which is what Varoufakis is criticizing.

>According to Keynesians, if real wages fall, employment should rise

AGAIN, that's what neoclassical economists believe, NOT Keynesians.

>According to Varoufakis, "real wages fell by 40% but employment dropped" which is the exact opposite of Keynesian economics.

No, that's what Keynesian economics predicts which is the exact opposite of what Neoclassical economics predicts.

>Another phrase for "Keynesian economics" is "macroeconomic models taught at the best universities", which is what Varoufakis is criticizing.

Neoclassical seems more favored these days despite its atrocious predictive capabilities. This is what Varoufakis was criticizing.

You don't seem to know what Keynesian economics is. Please google it. Other key phrases include "sticky wages".

If you think I'm wrong, please show how to use a Keynesian theory to predict "real wages fell by 40% but employment dropped". Good luck.

The problem is that a huge swathe of mainstream and formerly mainstream macroeconomic viewpoints are classed as "Keynesian", and the mainstream "New Keynesian" macroeconomic model you speak of which focuses on manipulating inflation to overcome resistance to real wage cuts and assumes a minimal role for fiscal policy is rather different from the traditional "Keynesian" (and "Post Keynesian") emphasis on increasing net government spend to stimulate consumption in a downturn.

Pretty much any undergrad who's read their introduction to national accounts and Keynesian concept of aggregate demand and multipliers can devise a set of simultaneous equations which will yield both a real wage fall and an unemployment rise in a basic stylised macro model if you also slash G and raise T (especially if the assumption is - as with Greece - that the expected debt servicing will largely be repatriated to overseas bondholders)

>You don't seem to know what Keynesian economics is.

I'm really not the one who is confused here :)

>If you think I'm wrong, please show how to use a Keynesian theory to predict "real wages fell by 40% but employment dropped". Good luck.

Simple. Reduce aggregate demand enough (e.g. by slashing government spending like Greece has done) and employment and real wages will both drop.

It's neoclassical economics with its idiotic presumption of 'full employment by default' that can't account for real wages and employment dropping at the same time. According to that theory, wages will just keep dropping until everybody is employed.

Step 1: Reduce aggregate demand enough (e.g. by slashing government spending like Greece has done) and

Step 2: ???

Step 3: employment and real wages will both drop.

How do you fill in step 2? Remember, I asked if you could show how Keynesian theory predicts this, not assert that it does.

Aggregate demand is the quantity of all goods demanded in the economy.

1. Aggregate demand drops. This shifts the curve to the left. These leads to a drop in the price and quantity of goods exchanged in the economy.

2. If firms are producing less goods they need less workers to produce these goods.

3. If they need less workers, the demand for workers shifts to the left.

4. This means the price and quantity of workers drops(wage cuts and increased unemployment)

Price and wage stickiness is one tool that New Keynesian economists use to try to explain business cycles using microfoundations.

Keynesians don't need it they use other routes to explain why aggregate demand exists(Pigou's wealth effect, Keynes interest rate effect, and the Mundell-Fleming exchange-rate effect). The downside to the Keynesian approach is the Lucas critique[0]. That relationships based on historical data are vulnerable to change when monetary policy changes. This started the New Keynesian/NeoClassical/Keynesian dvision.

[0] - https://en.wikipedia.org/wiki/Lucas_critique

Aggregate demand is not a quantity, it's a relationship between output and price level. But anyway, following your story, you get reduced employment.

But you don't get involuntary unemployment - people employed at a price $P as well as people unemployed but willing to accept work at the same price. All your story gives us is that there is a new market clearing price for labor at a lower price level, e.g. $P2 < $P. Fewer people are willing to accept labor at $P2, so they voluntarily go without work.

This is pretty much just basic supply&demand. You don't even need to go as far as Keynesian theory to get this out. If this is Varoufakis' story, it's hardly clear why he is criticizing classical econ 101 at all.

You're right that if we shift the aggregate demand curve its all econ 101 from there to wage and employment drop.

The difference between schools is that even though Keynesians believe in an aggregate demand curve( a relationship between price level and output) the neoclassicals(i.e. Chicago school) do not.

Varoufakis is criticizing the neoclassicals because they don't believe in an aggregate demand curve. Instead all of their modelling is done on the supply side. And its very hard to tell a supply side story where both employment and wages fall.

Involuntary unemployment is an easy jump from falling wages and employment.

It's not very hard to tell a "supply side" story where employment and wages fall at all. Just repeat your supply & demand example but substitute a specific good for aggregate demand. Or assume a decrease in the demand for labor due to automation, a reduction in labor hoarding, better ability to sort employees by productivity, etc.

Also, Varoufakis is criticizing "macroeconomic models taught at the best universities". Keynesian economics has been taught at universities for nearly 100 years.

I'm not quite sure how any of those supply side effects could cause unemployment or wage changes on the scale of what is happening in Greece. But if you could explain how those effects could have led to the unemployment and wage drops we've seen in Greece I would love to learn.

It seems to me there are two possibilities.

1. When Varoufakis talks about macroeconomic models taught at the best universities feature no accumulated debt, no involuntary unemployment and, indeed, no money (with relative prices reflecting a form of barter) he is talking about Keynesian.

Keynesian theory includes involuntary unemployment, accumulated debt, and money. So Varoufakis would have to have been mistaken. And he is shown to be especially confused when he later remarks

Moving to the micro level, the observation that, in the case of Greece, real wages fell by 40% but employment dropped precipitously, while exports remained flat, illustrates in Technicolor how useless a microeconomics approach bereft of macro foundations truly is.

This means he believes Keynesians are especially focused on microfoundations and ignore macro foundations. When this is actually true of the Neoclassical school. Then there is the issue you brought up. Varoufakis critiques Keynesians at the beginning and then appeals to it at the end. This implies he does not understand the basics of Keynesian theory. This is very surprising because he thinks of Keynes as one of the economists that personally influenced him the most.

2. Varoufakis is actually talking about Neoclassical economics.

This makes a lot of sense. Many Neoclassical economic models lack money, don't have involuntary unemployment, and lack accumulated debt. In addition it is very hard to tell a story about large wage drops, and growth in unemployment from microfoundations(basically supply-side). This means he is being consistent when he later appeals to Keynesian economics.

Varoufakis is obviously a very intelligent man who has spent 28 years studying economics. I would be incredibly surprised if he was confused about the basics of the two most influential schools of thought in macroeconomics.

>Also, Varoufakis is criticizing "macroeconomic models taught at the best universities". Keynesian economics has been taught at universities for nearly 100 years.

That still doesn't make the models he was actually describing any more Keynesian.

It it taught, although it has fallen out of favor somewhat. The preferred school for teaching these days is neoclassical, which is the school he was criticizing.

Keynesian != Neoclassical

Just in case you didn't get it the other 11 times, he wasn't talking about Keynesian economics.

Step 2 is:

* Austerity slashes public sector worker pay and pushes public sector workers into unemployment.

* Since public sector and private sector workers compete in the same job market, reducing the wages of one reduces the wages of the other through increased competition.

* Since the public sector is the largest single customer of the private sector, reducing its spending reduces the income of the private sector. This leads to lay offs and retrenchments in pay as well.

* Increasing unemployment also puts downward pressure on wages. The more desperate people are to have a job, the lower the wages they will accept.

* More downward pressure is put on wages by slashing social security, too (usually austerian target #1). The more unpleasant you make unemployment, the more desperate people will be to take a job. The more desperate people are to take a job, the lower the wages they accept will be.

This is a purely classical (pre-keynesian) story - demand goes down in many individual markets, and the market adjusts by reducing prices and quantity supplied. It has no output gap, no involuntary unemployment (read: wages at a price $P, but people willing to work at $P and unable to find a job), etc.

You've just shown that classical economics explains the Greek situation perfectly, contradicting Varoufakis.

No, neoclassical economics would have us believe that wages would go down until a clearing price was hit and everybody was employed.

This is, indeed, exactly the type of mind numbing idiocy that Varoufakis was talking about.

That's exactly what happens in your story. Wages go down from $P to $P2. Fewer people are willing to work at $P2 than at $P, so employment goes down. That's a standard market clearing story.

The classical claim is that don't have involuntary unemployment - prevailing wage levels equal to $P (in some segment) and simultaneously people unable to find work at $P.

Your story agrees with this.

Its not Keynesian theory but basic economics. Imagine demand for labor dropped, and supply stayed the same.(demand shifted to the left) Assuming that labor demand is downward sloping this would mean price and quantity demanded would both fall.

I have the same suggestion for you. Google it.

Why would a self-described 'erratic marxist' even be concerned about contradicting Keynesian economics?

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