Bill Mitchell — Keynes and the Classics – Part 3

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text during 2013. Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.

I am currently working on Chapter 11 which opens like this:

Chapter 11
11.1 Introduction and Aims
In Chapter 10, we discussed issues relating to labour market measurement. In this Chapter we will focus on theoretical concepts that underpin the measurement of economic activity in the labour market and the broader economy.

The Chapter has five main aims:
▪ To explain why mass unemployment arises and how it can be resolved.
▪ To develop the concept of full employment.
▪ To consider the relationship between unemployment and inflation – the so-called Phillips Curve.
▪ To develop a buffer stock framework for macroeconomic management (full employment and price stability) and compare and contrast the use of unemployment and employment as buffer stocks in this context.
▪ To more fully explore the concept of a Job Guarantee (employment buffer stock) approach to macroeconomic management.

NOTE:
At present, I am outlining the Classical theory of employment determination and output – which is the basis of their denial of involuntary unemployment. In the section last week – Keynes and the Classics – Part 1 – I explained how the Classical system conceives of labour supply and demand and how these come together to define the equilibrium level of the real wage and employment.

Yesterday – Keynes and the Classics – Part 2 – we showed how the labour market determined the level of employment and real wage, which in turn, via the production function set the real level of output.

In other words, all the major real variables in the macroeconomics system were considered to be determined by the labour market and the production technology – a supply-side approach.
We also introduced the concept of unemployment into the Classical system and saw that it could only be a temporary phenomenon if real wages were flexible. Only so-called institutional rigidities such as trade unions and government minimum wage legislation could lead to a situation where unemployment was persistent.

We then started to see why the Classical system denied the possibility of generalised over-production – and in that context introduced the Classical theory of interest via the loanable funds doctrine.

That is where I am picking up from today. Note Section 11.9 is a slightly revised version of yesterday’s text – to get me rolling again!

NEW TEXT STARTS TODAY

11.9 The loanable funds market – Classical interest rate determination

Bill Mitchell — billy blog
Keynes and the Classics – Part 3
Bill Mitchell