There is a very interesting debate taking place these days on the academic blogs between partisans of the classical new macroeconomics real business cycle school who are followers of the classical Walrasian position and the supporters of the Keynes camp who reject the classical position that markets are stable and settle in a general equilibrium way. In February 2001 I presented a paper on exactly this debate to the Eastern economics Association meetings in New York. I posted the paper on this web site in 2011 but I think it is appropriate to repost here as this debate rages since I think it can make a useful contribution to the discussion. I post it  here below.

In Search of the non Walrasian labour market model in the era of Globalization by Harold R.Chorney, Professor, graduate program in public policy and public administration; Concordia university, Montreal, Quebec

Paper presented to the Eastern Economics Association Meeting. New York, Feb.23, 2001

This is another preliminary version of another chapter in my forthcoming book that I originally presented to the Eastern Economics association meetings in New York in 2001. in this paper I was trying to find a way to harmonize the results of Keynes’s rejection of classical equilibrium and the theory of voluntary unemployment as opposed to a long run stable equilibrium at employment rates well below an acceptable rate and with chronic involuntary unemploymentwith the contemporary reality of globalization.

Introduction and overview

The nature of the debate that took place between Keynes and his contemporaries over the operations of the labour market continues to be at the centre of considerable public policy discussions. The classical position of the 1920s and 1930s that argued that in the long run Say’s law held and markets would clear themselves of surplus labour, although once dethroned by Keynes has now returned as new classical orthodoxy.

One of the leading authors of a text in the introductory field of economics Gregory Mankiw argues that most economists (including clearly himself) accept the natural rate hypothesis and that “classical economics is right in the long run”. Furthermore, Mankiw while paying lip service to Keynes’ “remarkable contribution” dismisses Keynes’ General Theory as an “obscure” and “outdated” book. Whenever labour markets function inefficiently the explanation it is claimed always lies in supply side side frictions and restraints on trade.[1] It is a considerable irony that Mankiw claims the mantle of neo-Keynesianism while pointing out that reading Keynes and seeking to discover what he meant in his work is irrelevant. “If neo Keynesian economics is not a true representation of Keynes’ views, then so much the worse for Keynes.”[2]

Unemployment is voluntary, structural or natural. The restoration is complete. The arrival of the notion of globalization and the sharp rise in unemployment during the 1990s in many industrialized countries (see chart one Appendix) has once again however brought these debates back to centre stage. The five year “boom” and nine year growth spurt in the American economy temporarily pushed some of these questions to the back burner. In Canada the boom never really took hold until late in 1998. In Japan most of the decade has been one of growing unemployment and depressed financial and stock markets. France and Germany have suffered high unemployment for much of the same period. The return of recession talk in the US and the evidence of slowing down will return these issues to the centre of debate.

In this paper I seek to explore these qualities within the framework of the “new” economy and globalization. My goal is to lay some of the foundations for a theory of labour market behavior that is non Walrasian, in the sense of semi-automatic clearing.[3] This model is closer to the vision of Keynes and his belief that markets did not always clear in the short run and that prolonged slumps in the longer run might still occur even in an open economy model where there was some wage flexibility.

In order to accomplish this task I combine a descriptive analysis of globalization with a reinterpretation of part of Keynes’ original argument about how labour markets worked or didn’t work during the slump of the 1930s. There is no formal model constructed although the rudiments of one are indicated.

The question of globalization

The era of globalization and the construction of trade blocs like NAFTA has altered the behavior of labour markets. Trade unions, anti-free traders and other critics argue that real wages have been depressed in comparison with previous standards. In all three countries that are members of NAFTA, the US, Mexico and Canada partisans of the trade union movement, community activists, ecologists, students and anti-free trade researchers have written extensively on the negative impact of the trade pact upon workers’ rights, wages and life chances. Lower unemployment has been accomplished in Canada and the US but not in Mexico.[4] But it is alleged at a considerable cost in terms of living standards and the rights of working people. Furthermore, there is no evidence at least in the case of Canada that NAFTA has been responsible for the decline in unemployment as opposed to a normal cyclical recovery brought about by monetary and fiscal policy. Indeed, the recovery phase in the cycle has been brought about by monetary and fiscal policy. Indeed, the recovery phase in the cycle has been significantly retarded in comparison to previous cycles. Whether trade liberalization or excessively monetarist policy is responsible is a very debatable and still unresolved argument.

For an extensive discussion of these issues from a labour point of view see the publications of groups like the Canadian Centre for Policy Alternatives and the Council of Canadians; in the US the Economic Policy Institute, the Jerome Levy Institute of Bard College, and the trade unions; for Mexico see the work of Latina America Newsletter: regional reports Mexico and NAFTA and the Mexico project, a joint initiative involving researchers from the instituto Tecnologico Autonomo de Mexico, Georgetown University and the Norman Patterson School of Carleton University.[5]

Most of these publications document workers’ rights abuses, plant closures, falling rates of unionization (with respect to the US but not Canada), increased anti-labour legislation, for example, in Ontario Canada’s largest and most industrialized province, and the general assault on social welfare programs, health care and educational entitlements. Many analysts are very aware of the job search models and the policy mix associated with these models but prefer to regard these approaches as ideologically inspired covers for anti-labour policies.

Some of these policy changes took place under the auspices of the Reagan and Bush (the elder) administrations. But some under the Clinton administration.[6]

An early example of this sort of critical assessment is Frances Fox Piven and Richard Cloward. The New Class War: Reagan’s Attack on the Welfare State and Its Consequences published in 1982. Clinton’s welfare reforms which were very much in the spirit of efficient job search labour market clearing models inspired widespread anger and criticism among traditional Democratic supporters. President George W. Bush’s program of increasing the role of charitable and religious organizations in helping the poor is simply the logical progression it is alleged of what has gone on over the past twenty years under 3 presidents Republican and Democratic. Its intent is to soften the edges of the efficient market approach and it also appears to reflect the genuine spiritual side of Mr.Bush. Whatever, its intent it shares a common perspective that unemployment and poverty is a personal or supply side rather than systemic or demand side problem.

In Canada, in particular, there has been an explosive growth in anti-globalization publications and research. Recent Canadian publication in this tradition include Andrew Jackson et al Falling Behind: The State of Working Canada, 2000, Mel Hurtig, Pay the Rent or Feed the Kids: The Tragedy or Disgrace of Poverty in Canada; John Shields, Dismantling the Nation; Steven Shrybman, The World Trade Organization: A Citizen`s Guide; Christopher Merrett; Free Trade: Neither Free nor About Trade; Maude Barlow and Bruce Campbell, Straight Through the Heart: How the Liberals Abandoned the Just Society and John Warnock, The Other Mexico; Trevor Harrison and Gordon Laxer, The Trojan Horse: Alberta and the Future of Canada, and Jim Stanford`s Paper Boom.(See also Stanford`s article in Dean Baker, G.Epstein and R. Pollin, Globalization and Progressive Economic Policy in which Stanford effectively undermines the argument that it is freer trade per se as opposed to monetary and fiscal policy and exchange rate policy that has led to most of the negative effects experienced by Canada since entering into the FTA and NAFTA.

In the United States the Economic Policy Institute publishes a biennal report The State of Working America. Publications like David Gordon, Fat and Mean: The Corporate Squeeze of Working Americans and the Myth of Managerial Downsizing. James Galbraith, Create Unequal: The Crisis in American Pay; Ethan Kapstein, Sharing the Wealth: Workers and the World Economy; Thomas Palley, Structured Keynesianism and others have made very similar sorts of arguments. Much of this research has contributed a great deal to our understanding of the changes that have been taking place in North American society and how they are perceived by a siginificant group in society. In Europe there has also been a number of important works by writers like Robert Boyer, John Grieve-Smith, John Eatwell, Megnad Desai, Jonathan Michie, Ricardo Petrella, Hans Peter Martin and Harald Shumann, which have explored similar themes but from a European perspective.

Much of this anti-globalization literature has had a very polemical and ideological slant which has had substantial influence among the populist movement that is opposed to futher trade liberalization and globalization. The meetings that have taken place in Seattle, Davos, Montreal, Windsor and what will transpire this coming April in Quebec City have and will attract enormous protests in the streets such as we have not seen since the 1960s and early 1970s. Radicalism on the left, in the labour movement and the ecology movement is now reinvograted, at least in Canada and western Europe and perhaps also in the US, just at the moment when many neo-conservative commentators thought it was dead and buried.

The recent exchange between international financier and speculator George Soros in Davos and leaders of the anti-free trade anti-globalization movement meeting in Brazil by means of video conferencing and the complete refusal by the protestors to enter into a dialogue captures fairly well the character of what is going on. Preparations for the summit of the Americas in Quebec City in April include extensive and some would say excessive security arrangements that are likely to promote confrontation rather than dialogue.

Soros’ most recent book Open Society: Reforming Global Capitalism is all about how to reconstruct the international regulatory environments so that while preserving market forms of society a more progressive and stable framework is put in place. As he puts it “the weakening of the sovereign state ought to be matched by the strengthening of international institutions. This is where market fundamentalism, which is opposed to international authority just as much as to state authority, stands in the way.”[8]

A rather different popular account of what has been going on which seems somewhat overly optimistic about the continued likelihood of uninterrupted growth, but pessimistic about what it means for everyday life is Robert Reich’s book The Future of Success. Reich use a sociology and political economy approach to build up an image of a drastically altered world in which the symbolic analysts and others capable of branding themselves and extracting economic rents for access to the brand, including former politicians like Bill Clinton and himself, can look forward to high salaries and unlimited cyber and other real opportunities, but at the same time must pay the price of drastically diminished family values and growing over work and rootlessness.

But what is intriguing and relevant in Reich’s analysis is the notion that the internet is a great leveller in terms of pricing information and product quality. Much like the Walrasian auctioneer in the neo-classical labour market clearing model, information about the best products and the cheapest sources is quickly transmitted throughout the cyber-economy. This is a point of view that was shared by a number of advisors to President Clinton, like for example, Martin Bailey. In this new economy argument the internet, just in time production and information technology play a key role in reducing market frictions, uncertainty and lubricating efficient trading. It is also not hard to imagine how these new information interconnections and speeded up information sharing can also impact positively on labour markets and job search techniques. Workers who can access the internet or computer based information systems for distributing their CV and establishing appropriate salary ranges for their skills profile are less likely to stay unemployed for as long, ceteris paribus.[9] Given a widespread access to the new technology local monopolistic and regional or even national oligopolistic trading practices are not as likely to last in the face of out of region or even international competition. Only the transport cost gradient and reliability factor can continue to act as a blockage to full market integration. But over time this is likely to fade as a problem as the learning curve for the new technology flattens and the wrinkles and complications are ironed out.

Furthermore, in business to business e-commerce the sourcing of inputs is considerably more competitive than in the past. It is also no longer necessary for firms to stockpile large inventories or hang on to employees. In the case of a downturn in the economy the reaction is swift and ruthless. Alan Greenspan, himself has observed this in some of his latest pronouncements on the state of the American economy and the current slowdown. Just as cyber, information technology has greatly increased the speed of information and capital transfer thereby facilitating very rapid and relatively frictionless expansions it works equally well (or badly) in reverse. Cutbacks and slowdowns spread at lightning speed and the average consumer is quickly alerted to the changes. The economy, in effect, turns on a proverbial dime or perhaps we should say at the speed of the click of a mouse.

The Debate over Globalization

The debate is clearly about the clash of ideologies and discourses. Without doubt there is some truth to the critic’s claims. But there is also without doubt truth to the argument that trade liberalization when properly regulated, and perhaps even when not, produces enormous wealth as well as turbulence. The distribution of this wealth is another matter.

Furthermore, the debates that have been taking place far too often take place without careful analysis of the actual real, longer term, as opposed to short term nominal impact of the changes unleashed by globalization. Furthermore, they rely on no easily comparable models of economic behavior. Instead, there is a panoply of models, debates and assertions many of which contradict one another.

Compare for example, the 1998 Dean Baker, Gerald Epstein and Robert Pollin edited work on Globalization and Progressive Economic Policy with the 1999 Martin Feldstein NBER collection on International Capital Flows. Both works address some of the same policy issues. Feldstein’s 484 page collection does not even mention the word globalization in the subject index. Instead, the group of neo-classical mainstream economists address the explosive growth in equity markets, capital flows and the changes that modern technology has wrought in the management of financial transactions on an international level with fairly traditional descriptive, historical, institutional and analytical techniques. One is reminded of the debate that took place some thirty plus years ago between advocates of regarding international investment as the simple outgrowth of trade and therefore best analysed through international trade theory and the excitement generated by writers like Yale’s Stephen Hymer who believed that the political economy of the multinational corporation was a far more relevant vector of analysis.

Of course, the very term globalization is much disputed in the literature.

On the one hand, those who consider it to be a real phenomenon point out statistics like the following: the average cost per short ton in ocean freight charges has dropped from $95 in 1920 to $29 in 1990; average air transport revenue per passenger mile has fallen from 68 cents in 1930 to 11 cents in 1990; the cost of a 3 minute telephone call from New York to London has fallen from $224.65 in 1930 to $3.32 in 1990 to 50 cents in 2001.

World trade has risen from 629 billion dollars in 1960 to 5.2 trillion in 1995 dollars; foreign direct investment flows have increased four fold in the 1990s from 629 billion U.S. dollars. Financing activities associated in the international capital markets in the form of bonds, equities and debt has increased from 610 billion in 1982 to 1572 billion in 1996. Foreign direct investment in the US has increased at a rate of 27% per year. The daily volume of foreign exchange has risen from 718 billion dollars in 1989 to 1579 billion dollars in 1995 or at a rate of 14% annually. Large multinational corporations like Mobil Oil, Dow, Coca Cola, and American Express earn over half their operating profits in international business. Leading companies like BP, GM, Sony and Microsoft do business in more than 100 countries around the world. A company like Nestle has over 203,000 employees world wide while employing only 6700 in Switzerland.(See Suk H.Kim and Seungh Kim Global Corporate Finance, Oxford, 1999, Blackwell, ch. one See also the work of Kenichi Ohmai.) The world has become a true global village interconnected in a 100 different ways on any given day. One can enter the internet in Montreal and within a few minutes one is in touch with London, Paris, Tokyo, Sydney, New Delhi and the Middle East at a very nominal cost.

The sceptical view

Many analysts point out however that this global village notion is much overblown particularly with respect to the United States economy where dependence upon external trade with respect to exports is still only about 10% of the GDP.[10] In Canada, the percentage is much higher, around 40%. But once we net out double counting on goods that are first imported than re-exported with some value added on, actual dependence is of the order of 25%.

In the case of the US the percentage of the total GDP accounted for by merchandise exports and imports is about 19%. If we use the broader measure of goods and services the figure rises to 24%. However the comparable figure in 1880 were 16.4 and 19.7% respectively. What is noticeable is that from this peak in the nineteenth century the proportion declined through most of the twentieth century, particularly from 1930 to 1960 and then began to rise again. The figure more than doubled from 1960 to 1980 and grew again during the 1990s. In the area of merchandise exports the trend of collapse from 19th century highs during most of the twentieth century with the ratio only matching the 1880 high in 1999 is striking.[11]





($ in millions)














































































*GDP for 1999 X + M + exports plus imports

Sources: Historical Statistics of the United States: Colonial Times to 1957, U.S. Dept. of Commerce, 1960; Economic Report of the President, U.S. Government Printing Office, various issues; Survey of Current Business, April 2000 from Robert Dunn, “Has the US Economy Really Been Globalized?”

Dunn argues that in terms of capital markets, real interest rates, volume of trade and synchronization of business cycles there is little evidence of a truly global economy. As he puts it “Evidence of a fully globalized U.S. economy is sparse.” He further argues that the collapse of the Bretton Woods system of exchange rates represents a “shift away from globalization” loosening the linkages that once constrained macroeconomic policies. “Because the U.S. economy is not globalized economic policy should not be based on the fear of its effects.” (P.64)

He then makes clear that his own agenda involves fast tracking expanding free trade, NAFTA and another round of the WTO. In this respect, although he may well be right about globalization, he might well be wrong about dismissing the critics of what has been happening so swiftly. Full steam ahead with trade liberalization may seem very appealing but there are some serious potential roadblocks. For, at the base of much of the criticism there is a certain malaise that needs to be addressed.

This malaise involves a widespread anxiety among many people that the current economic situation is not stable and has involved an erosion of equity. Considerable wealth has been created but the distribution of the rewards and externalities has been very one sided. Involved a long period of economic disruption and erosion of social programs, educational access and other key aspects of the post-war welfare state. A strong sense of grievance and socio-economic class difference has arisen and once out in the open is no so easily put back in the box. Furthermore, the solutions to supposed labour market rigidities that are usually suggested by economists involving further cuts in income support programs are widely resented by the poor and lower income groups and their intellectual supporters.

It was a similar sort of malaise that John Maynard Keynes dealt with in the 1930s when he argued that cutting money wages would not be a practicable solution to the problem of high unemployment despite all the elegance of classical theory. In Keynes’ view at the time the extent of money wage reduction required to restore full employment in the middle of the slump was beyond 20% and therefore was well beyond what could be accomplished in a democratic society without provoking extraordinary turmoil.

In fact Keynes doubted “if any reasonable conceivable reduction would be sufficient.”[12] In addition, of course, he believed that because of the uncertain or non ergodic nature of the investment process it was unwise to expect that a totally unregulated market apparatus left to its own devices could avoid periodic and long lasting slumps, no matter how flexible wages were. Even if the new information technology has reduced uncertainty in some respects considerable uncertainty and herd like behavior in response to shallow information remains a destabilizing factor on world financial and stock markets.

On the other hand, in contrast to Dunn, a number of analysts from neo-classical, institutional and post-Keynesian perspectives offer analysis and data to suggest that globalization is a real phenomenon involving increased importance of foreign trade including merchandise exports and financial and other services. At the same time, most analysts recognize that with respect to historical comparison the period of 1870-1929 in the case of Latin America, and Africa trade loomed larger during this period than it does now.[13]

The post-Keynesians define globalization as “an accelerating rate and/or higher level of economic interaction between people of different countries, leading to a qualitative shift in the relationship between nation states and national economies.”(P.5 Dean Baker, Gerald Epstein & Robert Pollin) Baker et al then examine a number of indices to make their argument.

We should recall that in matters of such global journalistic sex appeal it is often the case the real evidence is distorted or lacking. What counts at the level of journalism is all too often appearance and trendiness rather than scholarly substance.

Clearly in the area of globalization we have a debate that is not possible to resolve decisively yet. In a similar fashion, it is not yet clear whether the innovations in information technology are of the same order of impact as the chemical revolution, the automobile revolution, and the steam revolution that preceded them Radical innovations are those technological changes “that could not have evolved through incremental improvements in the technology it displaces.” Extreme forms of radical innovation are called “a general purpose technology.” They begin as a fairly crude technologies with a limited number of uses; they evolved into much more complex technologies with dramatic increase in their efficiency, in the range of their use across the economy and in the range of economic outputs that they help to produce. As they diffuse through the economy in wave like formation, they are improved in efficiency and expanded in their range of use[14] In their secondary and tertiary rounds they perform like Raymond Vernon’s notion of the product cycle undergoing adaption and readaptation in less affluent economies or more general and widespread forms.

The point is that we are, despite the growing degree of trade interdependence and capital flows among nations and the phenomenal growth of the internet far from a completely globalized economy.(See Reich for the most optimistic and contrary view of how far we have come in this direction) Nevertheless, the speed with which information and currency can be transmitted has changed drastically thereby laying the groundwork for a global village economy with a potentially vast electronically accessible marketplace.

But when we examine the composition of the labour force we still can see that a very substantial part of it still engaged in the old economy as opposed to the new. For example, in Canada out of a total of close to 12 million employees and a labour force of 15 million only 354,100 employees can be regarded as members of the new economy industries by the very broadest measure possible. See Table 2 below. This represents 3% of all employees.

Of course, the output of these employees in terms of computers, computer services and bio-technology products and pharmaceuticals are far more widely diffused throughout Canadian society. For example, it is estimated that more than 50% of Canadians are connected to the internet.(According to Statistics Canada, in 2000, 57 % of Canadian workers used a computer at work, 78 % of whom used it on a daily basis. Source: Perspectives on labour and Income, May 2001,vol.2,no.5 http://www.statcan.gc/pub/75-001-x oo501/5724-eng.html) Nevertheless, despite all the hype the traditional economy remains by far the major employer. For example, there are 1.2 million people employed in the health care and social services sector and close to a million employed in the education sector. 623,000 people work as employees in food and beverage industries.[15]

TABLE 2 (see table 2 at bottom of end notes)


Employment in thousands

In politics and public policy perception is critically important. The fact that so many opinion leaders and financial leaders speak as if we did live in a globalized economy cannot be so easily dismissed. Often the rhetoric of globalization like the virtual world of cyber space can have enormous impact upon both policy and stock values. The bubble run-up in the NASDAQ is now over. We have yet to measure the full consequences of this speculative mania and the ensuing crash. It is possible that the crash and recession will drastically downsize the importance of this new sector of the economy, but I doubt it. Like the automobile, the airplane, the telephone and the television the impact of this new sector is unlikely to disappear for a long time. It is probably more appropriate once we deflate the irrational exuberance associated with it in terms of overblown rhetoric and bubbles on the stock markets to view it as an epoch making technological innovation whose impact will spread over several decades.

The Labour Market in the New Economy

It is one of my goals in this paper to begin to construct a model which can link market outcomes in both wages and employment rates and therefore living standards with our understanding of the way in which labour markets have been traditionally thought to have worked.

Unlike the pure Walrasian labour market I suspect that the new economy entails a series of market disequilibrium punctuated by interim stable quasi equilibria. The transition from one state to the other occurs as factors accumulate until they form a critical mass or until they form a catalyzing force. For example, in moving from a stable equilibrium a build up of a speculative boom on the high technology driven stock market initially powers a growth spurt in the economy but eventually leads to a major shock when after interest rate rises initiated by the central bank the bull turns bearish which can send the economy into a downward spiral. As the economy descends into this vortex, layoffs accumulate, excessive pessimism replaces excessive optimism and workers seeking jobs rapidly outnumber employers seeking workers. As unemployed workers grow consumer begin to tighten their own belts, creditors cease extending credit and inadequate aggregate demand becomes a problem. No invisible auctioneer or cyber space information co-ordination system can quickly enough overcome the pessimistic expectations that develop. It is probably the nature of this new technology that it exacerbates the rapidity with which speculative rumour and irrational thought processes gain influence over mass behavior. There may be a learning curve at work here that with time will normalize hyper-responsiveness. But for the time being what goes up rapidly can just as swiftly go down. The recent behavior of the NASDAQ is excellent evidence of this.

Hence, my reference in the title to the search for a non Warlrasian labour market with both rigidities and wild swings. Of course, it was this kind of labour market that Keynes thought he had demonstrated as being at the centre of modern capitalism. The new classical economists and the rational expectations monetarists are convinced they have demonstrated that Keynes was wrong. The advocates of globalization claim that its greatest contribution is wealth creation and therefore a labour market clearing mechanism that is constructive of growing affluence. Yet there is considerable evidence that despite the growing overall affluence income and wealth inequality has also grown.

In some ways the optimistic partisans of the new economy like Robert Reich are arguing that the internet can perform the function of the invisible Walrasian auctioneer ensuring appropriate wages and prices. This may be true to a certain extent but it ignores the larger portion of the economy that is outside of the new economy. The labour market in North America is vast and differentiated with some portions of it attached to the new economy while others are most definitely tied to the old economy where few if any of the attributes of the new economy are present.

There are present 200 million workers in the North American labour markets (150 million in Canada and the U.S. alone) Judging by the Canadian data of these no more than 5% are directly linked to the “new” economy.

The models I intend to work with are abstract and conceptual but not mathematical. My goal is to achieve some sort of synthesis between more mainstream conceptions of these problems and the more dissident ones to see if we can figure out whether the claims of the critics are correct in more than just an ideological sense. Obviously in a paper of this sort it is not possible to do more than scrape the surface of the statistical data and analysis necessary to construct such an argument but it is nevertheless a beginning.

The Labour Market Clearing Model and Globalization:

The principal claim of the critics of trade and globalization is that it produces heightened growth at the enxpense of real wages and higher unemployment. Indeed, if we examine the data presented in works like Palley, Galbraith, Stanford and Jackson it seems fairly clear that compared to previous lengthy recoveries real incomes and levels of employment are either less or retarded in depth of recovery. For example in real wages there was virtually no growth since as far back as 1978. What little growth that did occur occurred only from 1996 on. In Canada the situation is even more negative. Real wages in Canada only in the past year and a half have moved ahead of what they were seven years before.(See Appendix tables A2)

When we look at the situation in Canada and the US during the 1990s it is clear that Canada suffered from more draconian policies and came perilously close to negative inflation and money wage cuts. The US, on the other hand, appears to have treated its problem of elevated unemployment with fairly gentle real wage reductions and a tolerance of moderately higher but no accelerating inflation. Just as Keynes had argued in the 1930s this seems to be a superior policy.

Galbraith also points out that as of 1996 American consumption as opposed to production wages have stagnated. Whereas production wages are determined by the division of the output between workers and shareholders and managers consumption wages affect the real standard of living of workers. Of course, he acknowledges as he should that product quality improvements have gone undetected by the CPI and that therefore workers are probably better off than the data can reveal.[16]

In Canada very similar claims have been advanced by Jackson et al. For example Jackson and his colleagues cite Statistics Canada data showing that the real wages of Canadian male workers in 1997 were the same as they were in 1975. Real wages for female workers, on the other hand had increased from $25,664 to 30,915 over the same period measured in constant 1997 dollars.[17] In Canada the employment recovery has been even weaker than in the U.S. In 1997 a full five years after the beginning of the recovery the unemployment rate still averaged 7.6% in Canada. Unemployment remained above 7% in 1999. It has only been in the last 2 years that unemployment has dropped to 6.8%. (See Appendix Table A1)

This discourse about high unemployment, delayed recovery and stagnant wages largely takes place without much reference to the debate in the literature over the labour market clearing model and the contrast between the Keynes inspired theory of labour market behaviour and that of the neo classical Pigovian model and its contemporary equivalent of Walrasian clearing under conditions of job search, supply side reforms and the theory of wage rigidity.

With respect to the general equilibrium model and the Arrow Debreu version of this model it is clear that while the mathematical solution of this model has been demonstrated it is only under highly restrictive assumptions and with the use of very sophisticated mathematical techniques. Such abstract solutions however mathematically credible they may be will cut little ice with protesters and dissidents and increasingly the general public.

Furthermore, Keynes and his followers long ago demonstrated the reality of disequilibrium in the labour market and the possibility that a stable equilibrium can be restored at employment rates that are well below an acceptable rate.

Of course, defenders of the classical position take issue with Keynesian unemployment and variously describe it as voluntary or structural. However, the recent experience of the United States with a prolonged period where unemployment fell below 5 and even briefly 4% without large rises in the rate of inflation has effectively detonated the natural rate logjam and opened up new possibilities for analysis. Here the work of economists like James Galbraith, Robert Eisner and Dean Baker are important.[18] I have always believed that the NAIRU rate was never satisfactorily demonstrated because long run pricing behavior departs dramatically from Friedman’s idealized vertical expectations adjusted curve. The actual performance of the Canadian economy can be better depicted as short term reduction in inflation accompanied by a dramatic rise in unemployment followed by a long term even larger rise in unemployment and a further reduction in inflation which in my view can be modelled better as the operation of the natural rate of inflation rather than the natural rate of unemployment. In other words, if we seek to lower inflation past a certain point unemployment rises very significantly and it takes a very long time to lower it to acceptable levels. The short term curve is more vertical and the long term curve more horizontal, exactly the opposite of Friedman’s diagram.

The controversy over the NAIRU has figured prominently in debates between central bankers and their economic advisors and politicians both in Canada and the United States. The debate between Keynesian neoclassical Robert Solow and the neo-classical monetarist John Taylor is an interesting case in point. In this particular debate from the perspective of a few short years back the question that holds centre stage is how much further lower can unemployment go below the 5.4% level that prevailed at the time of the debate in April of 1995. The answer which would have surprised Taylor and possibly even Solow is considerably lower.[19]

Solow points out that the Beveridge curve which relates the unemployment rate to the job vacancy rate proxied by the help wanted advertising index appears to have shifted back to the more favorable position it was in the 1950s and 1960s prior to the rise of OPEC and stagflation. In other words the gap between the two rates has narrowed for a given rate of unemployment. During the inflationary 1970s and early 1980s the gap had widened significantly. By drawing on insights from Okun’s earlier work it becomes clear that job search is now once again more efficient. “International competition is tough; workers and employees fear that jobs and businesses lost now may never be regained. The political atmosphere does not favour workers. Service industries are growing in importance, and they are not organized in exactly the same way as traditional industries.”[20]

Taylor’s declaration “that an increase in money growth will have no long-run impact on the unemployment rate; it will only result in an increase in the inflation rate” (p.31) clearly needs a far reaching reassessment. It needs to be reassessed in the light of what has been transpiring in recent months in the American economy. Unemployment touched bottom at 3.9% in September and October 2000. Alan Greenspan’s earlier interest rate rises and the age of the cycle and excessive stock market exuberance turned sour combined, to cause growth to dramatically slow down. Unemployment has now risen to 4.2% and will probably rise higher in the coming months.

With respect to Taylor’s declaration unless, of course, one wishes to hide behind the designation “long run” it seems clearly in error. As Keynes once famously put it “in the long run we are all dead”. The fact is that the United States experienced a nine year long period where unemployment rates dropped below 6% for five of those years. Rather than being followed by a rise in inflation it appears that they will be followed by a rise in unemployment because of the US Fed’s unwarranted fear of inflation. One can and perhaps should quibble about the actual internationally comparable rate of American unemployment (for example, in comparison to Canadian rates) but all the evidence suggests we could only adjust the rate upwards by a percentage point or perhaps 1.5% points at the most. Here we would be performing this adjustment to take into account the larger prisoner population, the relatively larger military and the possibility that some of the poor unemployed go uncounted in surveys because of lack of telephones.

Hence the issue is no longer can unemployment be reduced but how long it can stay very low without triggering inflation and what impact does this situation have on wages?

A plausible model of the role of money stock changes on unemployment with long run positive possibilities might be along the following lines and makes a Keynes style connection between lowering unemployment and lowering interest rates.

dU=f(dM2; di; dT/K; {X-M}; dI; dC; dG; d{G-Tx}; d[Bad-Bsd]; dL/dLq; P; e1,e2,e3; e*) where

dU is rate of change in unemployment

dM2 rate of change in growth in the broadly defined money stock

di rate of change in the real short term interest rate

dT/K rate of change in technological innovation relative to the capital stock

X-M the trade balance

dI rate of change in investment

dC rate of change in consumption

dG rate of change in Government expenditures

{G-{Tx+nbr} the size of the government borrowing requirement where Tx is tax revenues and nbr is non budget revenues

P policy regime in place

d[Bad-Bsd] rate of change in the central bank purchase of debt less the central bank sale of debt

dL/dLq ratio of rate of change in new labour market entrants to rate of change in those leaving the labour market through death or retirements

e1 expectations about changes in the unemployment rate

e2 expectations about changes in sales and business conditions

e3 expectations about changes in the financial markets

e* an estimated error factor

We are making the growth in employment and the reduction in unemployment a function of the rate of changes in the money stock broadly defined; changes in the rate of interest; changes in technological innovation relative to capital; changes in the trade balance; changes in consumption, investment and government spending; changes in the public sector borrowing requirements; changes in the rate of modernization of debt; changes in the ratio of the rate of change of new entrants to the labour market due to migration and demography to quits from the labour market due to retirement and death; and a dummy variable P for policy regime in place, monetarist or crudely Keynesian; plus expectations about unemployment rates, business and sales conditions, financial markets and an estimated error factor, e*.

In other words changes in the money stock are very far from the only variable that needs to be considered but in any case they are not insignificant.

Furthermore, since we can decompose the GDP into P and O i.e. prices and actual output, along with Keynes, I think that initially at positions far above full employment most of the stimulus from looser monetary policy affects output over time as the unemployment drops more and more of the impetus affects prices and less and less output. This is a position that Keynes adpts in The General Theory which I still find quite convincing.[21]

Keynes’ 1931 view of Labour market clearing

Keynes beginning from a classical quantity perspective migrated to a model of aggregate demand and supply but was unable to satisfactorily sort out the micro foundations of his model. Keynes was certainly aware of earlier classical variants of job search theory and efficient markets. Part of this quarrel with the classicals involved his reaction to proposals to cut the dole in order to make workers more likely to find work. Hence, his interest in aggregate demand and the impact of cuts upon it.

We must also remember that for Keynes any sort of final equilibrium was a kind of chimera for as he put in a letter to Hubert Henderson “I should be prepared to argue that in a world ruled by uncertainty with an uncertain future linked to an actual present, a final position of equilibrium, such as one deals with in static economics, does not properly exist.” On the other hand, Keynes also argues that in an exchange with Shaw that “I am not concerned with instantaneous snapshots, but with short period equilibrium, assuming a sufficient interval for momentary decisions to take effect.”[22]

In debating over the 1930s slump Keynes explored the parameters of the labour market clearing model in detail. For example, in his response to the Macmillan Committee on establishing a central bank Keynes who was a member of the committee sought to answer a questionnaire that he drafted. The first part of the questionnaire went as follows.

In what way would British employment, prices and real wages be affected by i)the increase of investment a) in the world at large b) in Great Britain ii) a tariff iii) a reduction in British money wages a) all round b) in the relatively highly paid industries? [23]

In his answer Keynes tried to define the notion of “equilibrium real wages” as follows:

I define equilibrium real wages as those which are paid when all the factors of production are employed and entrepreneurs are securing normal returns, meaning by ‘normal’ returns, those which leave them under no incentive either to increase or to decrease the money offers which they make to the factors of production.”(p.178 CW Vol 13, Pt.I)

Unless the level of money wages at home relatively to money wages abroad is such that the amount of foreign balance (i.e. of foreign investment) plus the amount of home investment at the rate of interest set by world conditions (i.e. which just prevents gold movements is at least equal to the amount of home savings, business losses will ensue. Thus there cannot be full employment unless this condition is fulfilled.(CWVOL 13, PT.I, p.178)

Now much has been claimed about Keynes being only concerned with a closed model as opposed to an open international model as is argued prevails under globalization. But, in fact, in this memorandum Keynes was clearly aware of the difference and treated both possibilities.

Equilibrium real wages depend on: a) the volume of physical output; b) the technique of industry taken in conjunction with the volume of existing capital; c) the equilibrium terms of trade (by which Keynes means the terms of trade which obtain when full employment is fulfilled.) Ibid.

What is most useful from our perspective is the fact that Keynes dealt directly with the challenge posed by differences in money wage rates between domestic and foreign competitors.

As he puts it, the existence of a disequilibrium is the result of changes in any one of these factors.

In Keynes’ view in 1931 Britain’s problems were due to the fact that the terms of trade had turned against her without a compensating reduction in money wages.(p.179, vol.xiii, Pt.1) he also believed that concentrating on money wages relative to those that prevailed abroad in countries that produced competing products was more likely to yield insight than focusing on real wages.

As he put it

“a rise in money wages yielding higher real wages relative to wages abroad is far more likely to affect employment than an equal rise in real wages due to a fall in the price of imported foodstuffs.(ibid, p.181) This is clearly true when we consider the issue from the perspective of the employer. It may well be that employers will experience a comparable rise in the value of their profits due to declines in the price of foodstuffs but it is much less noticeable and therefore less significant from the point of view of the employer consciously choosing whether to hire employees or continue to keep employees already hired. On the other hand increases in money wages will not be viewed with same equanimity unless the rise in output per head is clear and noticeable. Working in reverse reductions in money wages brought about because of the pressure of falls in demand and foreign competition will have much more significant impact upon the domestic economy than comparable cuts to real wages brought about by the rise in prices of imported goods”

Hence Keynes’ belief that the necessary level of cuts to money wages to achieve full employment equilibrium was impossible to achieve. Furthermore, since the objective of the exercise was to restore equilibrium by finding the appropriate real wage, at least in theory, Keynes was convinced that there was a better way of achieving than tackling money wages directly. As he puts it “it is precisely money wages…are sticky and difficult to move”, that the classical approach is an error. Furthermore, rising prices, (recall that the great depression had involved an enormous decline in prices), “had the virtue of throwing the burden over a much wider area, including the rentier class. “Thus from the point of view both of justice and of self-interest, the trade union leaders are right in preferring a rise in prices to reduction of money wages as a means of restoring equilibrium.”p.186(ibid)

Keynes and globalization

Similar sorts of logical problems and considerations arise when we consider the impact of globalization on money and real incomes in the U.S., Canada and Mexico in the current context.

For starters it is highly unlikely that the social unrest and bitterness unleashed by free trade liberalization and globalization would have been as great if the approach had been to avoid approaching money wage reductions through excessively harsh monetary policy as opposed to temporary and more modest real wage reductions brought about by gentle inflation. The contrast between the situation in Canada and that of the US, whatever the weaknesses of the American approach during the early 1990s seems striking in this regard.

Productivity increases that have flowed from the introduction of computer technology have in any case delivered significant results. It would have been far better to have avoided the speculative bubble on stock markets that flowed in part from the transfer of wealth from workers to entrepreneurial venture capitalists because of the reliance on wage and wage fund cuts. For it is this irrational exuberance on the stock market that has triggered the Fed interest rate rises which in turn have now brought about the end of the boom and the raised spectre of recession.

In fact, just as Keynes had predicted wringing inflation out of the system by adopting the zero inflation model has been extremely costly and inequitable with the brunt of the adjustment falling on the shoulders of the poor and the middle classes.

Further, the gains in productivity brought about by investments in new technology have made it possible to lower the unemployment rate to historically low levels (though not the lowest levels obtained during World War 2 without setting off accelerating inflation. In my view most of these productivity rises could have achieved without forcing down wages. Their positive impact would have been almost as large while their negative impact would have been much reduced of course, this would have necessitated more of Keynes inspired liberal strategy as opposed to the laissez-faire capitalist model that was celebrated during most of the last decade.

In any case the NAIRU model has been seriously contradicted. In its place a Keynes style model supported by economists like the late Robert Eisner, James Tobin, Dean Baker and Robert Solow and a number of post-Keynesians and Keynes style economists seems much more appropriate and necessary to develop further. Eisner, demonstrates the likelihood that once the unemployment rate drops below 6% anti-inflationary impulses can be strengthened rather than weakened. Many stimulative measures like job training, education programs and hiring subsidies that reduce unemployment also reduce inflation. It is also possible to substitute direct taxes for indirect ones and thereby reduce inflationary biases.(Eisner,pp.193 ff)

There is a fascinating exchange between Gottfried Haberler and Maynard Keynes where Haberler specifically asks Keynes whether or not he is simply saying involuntary unemployment results because of labour market clearing failures due to rigidities or the absence of perfect competition in the labour markets? In such a case writes Haberier, Keynes and the classics would be adopting the identical position.(CW vol xxix pp.270-273)

Keynes answers, however, by pointing out that no classical that he was ever aware of had argued that increasing the quantity of money as measured in wage units ad infinitum was the solution to unemployment. In other words a reduction in the interest rate was the solution, as opposed to a reduction directly in money wages which he argues that classicals believed worked because falling money wages led to rising profits. “I have always understood that they favoured a reduction in money wages because they believed that this would have a direct effect on profits, and not one which operated indirectly through the rate of interest.”

Keynes recalls his preface where he argued that those wedded to the classical tradition will “fluctuate between the belief that I am wrong and the belief that I am saying nothing new!” I believe this continues to be true. The debate over globalization and the labour market clearing model demonstrates in my view that Keynes was right to emphasize lowering interest rates and avoiding money wage cuts as a humane way out of the slump. The operations of the new economy may have moved us closer to the invisible auctioneer but there still remains the necessity of marrying this improvement in efficiency with a time tested strategy of promoting growth and sustaining aggregate demand and permitting gentle inflation and time to solve many otherwise intractable problems.

Accelerationism for the time being is dead. To paraphrase Mankiw it is an outdated concept that we can do well to escape from.


Canada’s Unemployment Rate 1990-2001
1990 8.1
1991 10.3
1992 10.5
1993 10.8
1994 10.6
1995 9.5
1996 9.6
1997 9.1
1998 8.3
1999 7.6
2000 6.8
2001* 6.8
Source: Statistics Canada: The Labour Force Survey

*latest monthly figure


United States Unemployment 1990-2001
1990 5.5
1991 6.7
1992 7.5
1993 7.0
1994 6.1
1995 5.6
1996 5.4
1997 4.9
1998 4.5
1999 4.2
2000* 4.1
2001* 4.2
Source: US Bureau of Labour Statistics


1990 4.8
1991 5.6
1992 1.5
1994 0.2
1995 2.1
1996 1.6
1997 0.7
1998 0.7
1999 1.5
Source: Statistics Canada


Participation rate %




New Zealand

Both sexes

























65 and over

























65 and over





Unemployment rate
Both sexes

























65 and over

























65 and over





Source: Statistics Canada: Labour Force Survey


[1] N.Gregory Mankiw, “The Re-incarnation of Keynesian economics in B.Snowdon&H.Vane, A Macroeconomics reader eds. London&NY: Routledge, 1997.pp445-452.p.445.

[2] Ibid.p.446

[3] See Thomas Sowell, Classical Economics reconsidered, pp.35 ff for a good discussion of what the classicals meant by Say’s law.

[4] On the Mexican response to NAFTA see Mehrene Larudee, “Integration and income distribution under the North American Free Trade Agreement: the experience of Mexico in Dean Baker, Gerry Epstein and Robert Pollin, Globalization and Progressive Economic Policy Cambridge: Cambridge University Press, 1998, pp 279 ff.

[5] See;

[6] See the assessment of President Clinton’s administration and his legacy in, for example, in recent issues of The Nation, The Atlantic Monthly, Feb.2001, and in works like James Galbraith, Created Unequal: The Crisis in American Pay and Thomas Palley, Structural Keynesianism.

[7] See Jonathan Michie & John Grieve Smith, Managing the Global Economy, Oxford University Press, 1995; Robert Boyer & D.Drache, States Against Markets: The Limits of Globalization, New York: Routledge, 1996; Ricardo Petrella, Ecueils de la mondialisation: editions fides, Montreal, 1997; Dean Baker et al, Globalization and progressive economic policy, Cambridge University Press, 1998.

[8] George Soros, Open Society: Reforming Global Capitalism, New York: Public Affairs, 2000.

[9] For a still very useful discussion of these issues see Arthur Okun, Prices and Quantities: A Macroeconomic Analysis, Washington: Bookings Institute, 1981.pp.37-41&94-95.

[10] See Robert Dunn Jr. “Has the U.S. Economy Really Been Globalized?” The Washington Quaterly Winter 2001, Vol.24, No.1

[11] Ibid.p.55 Table one reproduced above

[12] John Maynard Keynes, The General Theory and After: Collected Works, Vol.13, p198. Memorandum by Mr.J.M.Keynes to the Committee of Economists of the Economic Advisory Council (A Group which provided advice to the British Prime Minister and his Cabinet on Economic Matters

[13] See, for example, Table 1 p.5 in Dean Baker, Gerry Epstein and Robert Pollin, Globalization and Progressive Economic Policy Cambridge: Cambridge University Press, 1998.

[14] Richard Lipsey & Kenneth Carlaw, “What Does Total Factor Productivity Measure?” in International Productivity Monitor Number one, Fall 2000, p.33).

[15] All data drawn from Statistics Canada, Annual Estimates of Employment, Earnings and Hours, 1987-1999.

[16] See James Galbraith, Created Unequal: The Crisis in American Pay, pp.73-81

[17] Andrew Jackson, David Robinson, Bob Baldwin & Cindy Wiggins, Falling Behind: The State of Working Canada, 2000 Ottawa: Canadian Centre for Policy Alternatives p.13 & 19.

[18] See Robert Eisner; The Misunderstanding Economy, Cambridge: Harvard Business School Press, 1994, See ch.8 for an excellent deconstruction of NAIRU, Dean Baker, The NAIRU: Is it a Real Constraint? in Baker et al, pp.369-387. See also Robert Eisner’s response pp.388-390; James Galbraith, ch.10.

[19] Robert M.Solow & John B.Taylor, Inflation, Unemployment and Monetary Policy, edited with an introduction by Benjamin Friedman, Cambridge: MIT Press, 1998.

[20] Ibid.

[21] See John Maynard Keynes, The General Theory of Employment, Interest and Money, London: Macmillan, 1951 pp.295 ff. see my discussion of Keynes’ theory of inflation in H.Chorney, Debts, Deficits and Full Employment in R.Boyer and D.Drache eds., States against Markets: The Limits of Globalization, New York & London, Routledge:1996.

[22] John Maynard Keynes, Collected Works vol xxix The General Theory and After: A supplement London: Macmillan & Cambridge University Press, p.222.

[23] Ibid. CW The General Theory and After Preparation Vol.xiii Pt.1.p.190.

Table 2

Estimates of employment for all employees by selected industry

employment in thousands



330 electrical and electronics 16.8

335 communications and other electronic equipment 63.9

337 electrical industrial equipment 22.3

338 communications energy wire and cable 4.8

374 pharmaceuticals and medicines 25.4

sub total 113.2

Trade and commerce

541 electrical electronic household appliances 9.9

574 electrical & electronic machinery equipment&supplies 95.1

subtotal 104.0

Commercial &business&personal services

772 computer&related 137.6

Total 354.8

Source: Statistics Canada:Annual estimates of Employment, earnings

and hours, 1987-1999.


About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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