Hayek and Tobin
By Arnold Kling
this particular essay combines brilliance and antibrilliance in remarkable degrees…The second half wanders off into Hayekian hobbyhorses that I don’t think are very helpful.
I wish that DeLong would elaborate on his concerns. Hayek says,
A completely rigid wage structure is therefore liable to lead to a gradual decrease in the level of real wages at which full employment can be realized…
The most important task at present appears to be convincing labor as a whole that removing the protection of the relative position of individual groups not only does not threaten the prospects for a rapid increase in the real wages of labor as a whole, but in fact enhances those prospects.
Hayek is saying that rigidity of relative wages impedes economic adjustment, which would mean that economic shocks would tend to cause unemployment. It seems to me that Tobin would say the same thing a few years later in his Presidential Address to the American Economic Association on inflation and unemployment. Tobin argued that inflation would produce changes in the relative wage structure.
It seems to me that both Tobin and Hayek would begin their analysis of recent economic performance in the United States with the boom-bust cycle in the stock market. Tobin of course would refer to q, his ratio of stock prices to the replacement cost of capital.
It seems to me that both Tobin and Hayek would locate the cause of persistent unemployment in the rigidity of relative wages. The web advertising salespersons, “business development executives,” and other souvenirs of the dotcom amusement ride have yet to mark their wage demands down to market. The result is the jobless recovery (see this econopundit post), which would better be called the high-output recession. That is, I would say that the economy is basically in recession mode, but output is still growing because of a secular rise in productivity.
Although Hayek and Tobin would disagree about the cure, it is interesting that they might agree about the diagnosis of today’s macroeconomic environment. I would not go so far as to endorse the second half of Hayek’s essay, but I think that “antibrilliance” is a bit strong.
UPDATE 7-31. Other recent discussion of the relationship between Austrian and Keynesian macro can be found on Brad DeLong’s site, Crooked Timber, The Volokh Conspiracy, and Roger Garrison’s web site (link from PrestoPundit).
For Discussion. If the story of a boom-bust cycle and wage rigidity fits the current situation, what is the best policy cure?