The discussion of the role in unemployment is a key theoretical divide between Modern Monetary Theory and mainstream approaches. Theoretical conclusions determine the suggested policy response of governments to unemployment. The structural changes to the labour market made by policymakers in the 1990s were based on following a theory....
One of the objections that conventional economists make to MMT is that it is "nothing new" and can be stated in terms of their models. One of the sharpest distinctions is between the MMT approach to employment and inflation based on fiscal policy and the conventional approach through monetary policy, which is based on NAIRU, an acronym for Non-Accelerating Inflation Rate of Unemployment. The MMT approach is based on the MMT JG and a buffer stock of employed, whereas NAIRU is based on a theoretical (unobservable) "natural rate of employment" and a buffer stock of unemployed.
A key difference between conventional economics and MMT lies in this distinction between a buffer stock of employed and a buffer stock of unemployed. Any discussion that does not acknowledge this is simply wrong. The gap between MMT and conventional approaches is stark and involves millions of people in the US.
While this is not the only distinction between MMT and conventional economics that cannot be reduced to a conventional model based on conventional theory, it is an important one and proponents of MMT should understand its basics of NAIRU and MMT criticism of it. Brian simplifies this in the post. But knowing that the key difference is a between a buffer stock of employed and a buffer stock of unemployed is sufficient for most purposes.
NAIRU, And Other Will-O'-The-Wisps
Brian Romanchuk
Brian Romanchuk
6 comments:
Load of waffle. Romanchuk says in his article:
“John Maynard Keynes created the field of macroeconomics…”. Nonsense: economists and people in general were considering the economy AS A WHOLE (macroeconomics) rather than the economics of individual households, industries etc (microeconomics) long before Keynes was born.
Then in the above quote he says “One of the sharpest distinctions is between the MMT approach to employment and inflation based on fiscal policy and the conventional approach through monetary policy, which is based on NAIRU…”. That’s nonsense. NAIRU is simply the idea that there is a relationship between inflation and unemployment, an idea which was probably doing the rounds in Ancient Rome because it’s a very simple and obvious point.
Whether a bout of inflation is caused by too much fiscal stimulus, or other hand because of excess MONETARY stimulus is WHOLLY IRRELEVANT.
Ancient Rome did the “denarius per day” fixed wage as a price anchor Ralph...
@ Ralph
"Macroeconomics, at least in its modern form, began with the publication of John Maynard Keynes's General Theory of Employment, Interest and Money."
https://en.wikipedia.org/wiki/Macroeconomics
Tom, That Wiki article says that macroeconomics "in its modern form" began with Keynes. You could equally well say physics "in its modern form" began with Einstein couldn't you?
Ralph, look at the definition of NAIRU - Non-accelerating inflation rate of unemployment. It’s literally the rate at which inflation is supposed to accelerate.
Notice how the CBO publishes the time series of this number?
Your theory that NAIRU is the just the belief that there is an inverse relationship between unemployment and inflation is incredibly obviously wrong. If so, what is the number that the CBO publishes?
@ Ralph
In a way. Einstein laid the foundation for macrophysics, Newton for mesophysics and Neils Bohr of microphsyics, the differences being in terms of scale and scope. While there is consilience among the branches, explanatory unity remains elusive. While the micro and meso scales are unified in terms of foundational equations, there is no set of equations uniting the macro with the meso and micro in a single explanation of a "unified field" (Einstein). Einstein sought to achieve but was not able to do so.
Keynes was the first to present macro specifically as a discipline with different foundations and method different from micro. Prior to Keynes the dominant view was that macroeconomic is just micro scaled up and not a separate field. Keynes proposed that micro and macro involved different scales and different scopes of study requiring a difference of approach to explanation. For example, he pointed out that the notion of macro as scaled up macro falls victim to the fallacy of composition. Micro and macro are consilient with the rest of science, but there is as yet no unified explanation within economics either.
Uniting the micro, meso and macro scales is also elusive in the social sciences and psychology for reasons similar to economics.
ON the other hand, Adam Smith's Wealth of Nations is arguably the first work in macroeconomics. However, prior to Keynes no one had applied modern economics methods (as distinct from classical economics) to macro. The modern period in economic can be viewed as beginning with Alfred Marshall's Principles of Economics (1890), which laid the foundation. The General Theory was not published until 1936.
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