№ XIX
The twelve plates
The classical promise is that a market economy rights itself — that gluts are fleeting, that idle men and idle machines are a passing disequilibrium the market will clear, that anyone truly willing to work at the going wage will in time find it. This volume is about the scandal that promise cannot explain: the deep slump, in which willing workers and willing employers fail to meet, not for any shortage of want or means, but for a failure of the whole to coordinate. Whether that failure is real, and what if anything cures it, is the unsettled heart of macroeconomics.
why can a willing worker, at the going wage, fail to find work?
There is a promise buried in the foundations of economics, usually unspoken because it is thought too obvious to state: that a market economy, left to itself, tends to employ everyone who wishes to work. Gluts, on this understanding, are passing things — a momentary mismatch, too much of one good and too little of another, soon corrected as one price falls and another rises. Idle men and idle machines are a disequilibrium, and disequilibrium is by its nature temporary, for the market is forever at work dissolving it: the unsold thing is marked down until it sells, the unemployed man offers to work for less until he is hired, and the system settles back, as water finds its level, at full employment. It is a reassuring picture, and over long stretches it is even roughly true. And then, every so often, it fails — not at the margin but catastrophically, with a quarter of the workforce thrown out of work and the factories standing dark for years on end — and that failure, which the reassuring picture cannot account for, is the thing this volume exists to understand.
The picture rested, at bottom, on a proposition named for Jean-Baptiste Say, though he was by no means alone in holding it: that there can be no such thing as a general glut. A particular good may be overproduced — too many hats, too few coats, the hatter ruined while the tailor thrives — but not everything at once, for the act of producing anything generates precisely the income needed to buy it. Every sale is someone's purchase; every wage paid is a wage waiting to be spent; and so supply, taken in the aggregate, creates its own demand, and a universal surplus is a contradiction in terms. Money, on this view, is a mere veil over a barter beneath — goods are in the last analysis bought with goods — and cannot itself be the source of a shortfall, since no one holds it save to spend it. A few dissented, Malthus most stubbornly and Sismondi beside him, insisting that demand might indeed fall short across the whole, that men might choose to hoard rather than spend and leave the warehouses full and the hands idle; and they were judged to have had the worse of the argument. For a century the orthodoxy held, and the slumps that came and went were laid to particular shocks and particular follies, never to a general deficiency that the market would not in time repair.
It was the Great Depression, and the book Keynes wrote in its depths, that broke the orthodoxy open. His claim was as plain to state as it was radical in effect: that the level of output, and with it the number of men employed, is governed not by the labor market and the wage but by the total — the effective — demand for what the economy produces, and that nothing whatever guarantees this demand will be enough to employ everyone. An economy can come to rest in full equilibrium, every market quietly balanced, with a great mass of its workers involuntarily idle — willing to work at the going wage, and unable to find anyone to hire them — and it can remain there indefinitely, because the forces the classics trusted to lift it out do not reliably operate. The thrift that is prudence in a single household becomes, when all practise it at once and the savings find no outlet in investment, a destroyer of the very demand on which every income depends: the paradox of thrift, one instance of the larger fallacy of supposing that what holds for each must hold for all. And the investment that might have taken up the slack rests, Keynes saw, on expectations of a future that cannot really be calculated, and so at last on what he called animal spirits — a confidence that can drain away overnight and carry the whole economy down behind it.
The revolution did not go uncontested, and the counter-attack, when it came, was formidable. Milton Friedman led it, conceding less to Keynes than at first appeared: the great slumps, he argued, were not failures of the market but failures of the authorities who managed its money — the Depression itself deepened into catastrophe by a central bank that let the supply of money collapse. And there was, he insisted, a natural rate of unemployment, fixed by the real structure of the economy and its frictions, below which demand might push for a season but only at the cost of an ever-accelerating inflation; so that the apparent tradeoff between inflation and unemployment was a short-run illusion, and the long-run relation a vertical line. The new classical economists who followed pressed further still. If people form their expectations rationally, Robert Lucas argued, then any systematic policy is foreseen and undone, and the management of demand is powerless even in the short run; and the real-business-cycle theorists carried the logic to its limit, recasting the cycle not as a failure at all but as the economy's efficient and optimal response to real shocks — the adjustments of a system that is always, even in the trough of a recession, doing the best that can be done. The slump, having been redescribed by Keynes as a curable disease, was redescribed again as an equilibrium; and in it there was no involuntary idleness anywhere.
The argument has not ended so much as deepened, and the present state of the science is a guarded and unfinished synthesis. Most economists now grant that prices and wages are slow to adjust, that this stickiness gives demand real power over output in the short run, and that a central bank can and should lean against the cycle — a conclusion substantially Keynes's, but rebuilt on the rational, optimizing agents the new classics demanded. And then, in 2008, the thing returned that the elegant models had half-persuaded themselves lay safely in the past: a collapse of demand, a scramble for the safety of money, mass unemployment among the plainly willing, and interest rates driven to the zero floor where they lost their purchase — the liquidity trap Keynes had described, made real again, and the old questions with it. Money turned out to matter after all, in the manner the later plates of The Money set out; the labor market refused to clear, in the manner the plates of The Wage would lead one to expect; and the scandal of the willing worker who cannot find work stood once more in plain sight, owing nothing to any failure of the harvest or the machines.
What divides the two great parties, beneath the whole apparatus of models, is a question about nature. To the classics and their heirs, the market's tendency to full employment is something close to a law — mass idleness a temporary deviation the system will correct, or, in the boldest version, no deviation at all but a freely chosen adjustment, an equilibrium to be accepted rather than a failure to be cured. To Keynes and those who follow him, that same idleness is a coordination failure of the whole — a thing no single person wills and no single market mends, in which willing workers and willing buyers fail to find one another for want of nothing but the spending that would join them, and which therefore can, and should, be remedied by a hand from outside the market. The deepest question macroeconomics has, and the one on which it cannot agree, is whether involuntary unemployment is real. Behind it stands the suspicion that runs through the whole of this table, raised now to the scale of the aggregate: that mass idleness, presented as a natural and self-correcting equilibrium, may be instead a remediable failure mistaken for a law of nature. The twelve plates that follow trace the cycle from the glut and the effective demand that governs it, through the multiplier and the animal spirits, the sticky wage and the scramble for money, the monetarist counter and the Phillips tradeoff, rational expectations and the real-business-cycle denial, down into the debt-deflation trap and out again to the unsettled equilibrium where the argument now rests. Where the classics see a market clearing, this volume looks for the willing workers it left standing in the street. The argument remains open.