The Failure of the New Economics, by Henry Hazlitt

The Failure of the “New Economics” (Henry Hazlitt, 1959)

Chapter II

POSTULATES OF KEYNESIAN ECONOMICS

2. Wage-Rates and Unemployment

In explanation of the passage I have just quoted, he goes on:

Wide variations are experienced in the volume of employment without any apparent change either in the minimum real demands of labor or in its productivity. Labor is not more truculent in the depression than in the boom — far from it. Nor is its physical productivity less. These facts from experience are a prima facie ground for questioning the adequacy of the classical analysis (p. 9).

Are they? Keynes has here tumbled into a glaring fallacy. The absence of change in physical productivity is completely irrelevant to money wage-rates. What counts in economics is only value productivity — and value productivity stated in this case, of course, in monetary terms. If the marginal productivity of a worker is a given unit of a commodity that previously sold for $10, and the price of that unit has now fallen to $5, then the marginal value productivity of that worker, even though he is turning out the same number of units, has fallen by half. If we assume that this fall in prices has been general, and that this represents the average fall, then the worker who insists on retaining his old money wage-rate is in effect insisting on a 100 per cent increase in his real wage-rate. Whether the worker is “truculent” or not is entirely beside the point. If prices fall by 50 per cent, and unions will accept a wage cut, but of no more than 25 per cent, then the unions are in effect demanding an increase in real wage-rates of 50 per cent. The only way they can get it, and retain full employment, is by an increase of 50 per cent in their physical (or “real” value) marginal productivity to make up for the drop in the price of the individual unit of the commodity they help to produce. [Hazlitt, 1959, p. 20-21]

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Criticism of the Efficiency-Wage Theory

The “Efficiency Wage” is a New Keynesian theory aimed to highlight a so-called market failure. Gregory Mankiw describes the theory as follows :

There are various theories about how wages affect worker productivity. One efficiency-wage theory holds that high wages reduce labor turnover. Workers quit jobs for many reasons—to accept better positions at other firms, to change careers, or to move to other parts of the country. The more a firm pays its workers, the greater their incentive to stay with the firm. By paying a high wage, a firm reduces the frequency of quits, thereby decreasing the time spent hiring and training new workers.

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Understanding Human History, Michael H. Hart – Chapter 15, 16 & 24

Understanding Human History, Michael H. Hart. 2007.

Chapter 15

Racial Differences in Intelligence

Section 3 – IQ data: Blacks and whites in the United States

Although the studies differ, virtually all show a large difference between the average scores of American blacks and whites, with the differences clustering around one standard deviation. A few of those studies, including several of the largest ones, are listed in Table 15-1. [footnote 4] It is worth remarking, though, that those studies (like most others) probably underestimate the true value of δ (where δ is defined as the difference between the mean IQ of American whites of European descent and the mean IQ of American blacks). At least two factors contribute to this:

1) Many such studies include only students who are attending school, and omit high school dropouts. This factor causes us to overestimate average IQs. As proportionally more blacks than whites drop out of high school, the effect is to reduce the measured value of δ. [footnote 5]

2) Almost all such studies omit the prison population. Since prisoners, on average, have much lower IQs than the public at large, omitting them has the effect of overestimating the average IQ of every racial group in the United States. Since about 3% of American blacks are prisoners (but less than . of 1% of whites), omitting this factor leads to underestimating δ.

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The structure of production reconsidered – Jörg Guido Hülsmann

The Cambridge Capital Controversy (CCC) is sometimes cited as one of the strongest refutation of the Austrian Business Cycle Theory, considered by Mark Blaug as “the final nail in the coffin of the Austrian theory of capital”.

We must first point out that the “reswitching controversy” is empirically refuted. From Zonghie Han and Bertram Schefold (2005) :

An empirical investigation of paradoxes: reswitching and reverse capital deepening in capital theory

This paper examines the empirical relevance of the capital controversy. The price model of Sraffa and the dual models of the price and quantity systems of von Neumann become the basis of the investigation. In the course of the controversy, it proved easy to construct theoretical examples which contradicted the fundamental neoclassical hypothesis of an inverse capital demand function. This paper presents empirical examples for the first time. Thiry-two input-output tables from the OECD database serve as data. As a result, one envelope is found which involves reswitching. Reverse substitution of labour or reverse capital deepening are observed in about 3.65% of tested cases: they involve at least two switchpoints.

Theoretically, Guido Hülsmann, in “The structure of production reconsidered”, had investigated the issue. He explains that the interest rate and the production structure are not necessarily negatively related (i.e., a lower interest rate is related to a lenghtening of the structure of production) even though the interest rate still affects relative spending, as theorized by austrians. He proposes to develop and enrich the theory of the structure of production. He lists 8 possible scenarios, each of them having different implications. He finally investigates the implication of the consumer credit and the variation of monetary conditions. The former simultaneously thins and lengthens the structure of production. The latter has no systematic impact on the structure of production.

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