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Imran Siddiqui
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The Potterverse
Jan 1970
time: 00:19
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quote:
Following an outside external change, the demand curve for labour shifted left creating an increase in unemployment. Employers responded by reducing the number of workers and by cutting salaries. Both of these factors led to a decrease in consumption which then leads to deflationary pressure which in turn shifts the demand curve for labour further left. That sets up a new round for of layoffs and wage cuts and the cycle begins again.
Equilibrium is never reached. |
If the demand curve for labor shifts to the left, the equilibirum shifts to a new level. One where quantity and price falls to the new level. There is a decrease in consumption due to external shocks, which is simply result of the bust cycle. As you are aware after the bust comes a boom. There is less consumption, but the less cost in labor creates an equilibrium, where there is no need for further cuts. Less consumption doesn't necessary lead to deflation. Remember, inflation and unemployment are inversely related based on the Phillips-curve. Therefore, with the increase in unemployment, inflation is naturally supposed to fall.... which shouldn't lead to any kind of slippery slope cycle.
If what you say is true, then every bust of the business cycle would result in a lack of equilibrium. However, this does not occur, even in areas without as many checks as the US has.
Basically, when inflation falls, interest rates rise, and there is greater incentive for investment. This is the natural market force that pulls economies out of busts. More investment eventually leads to more jobs in the recovery period.
quote:
and this situation would show that your initial statement that eliminating the minimum wage leads to full employment is not true all of the time. |
No, perhaps not, but it is most of the time.... during the regular business activity periods and non-bust times.. the full employment is reached. During bust times you might stray from that, but usually (problems involving government like Japan or Great Depression withstanding) busts are short lived.
edit: Phillips Curve, not J-curve 
Last edited by Imran Siddiqui on 29-04-2002 at 11:42
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Tingkai
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To find the Northwest Passage
Aug 2001
time: 13:19
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quote:
Originally posted by Imran Siddiqui
If the demand curve for labor shifts to the left, the equilibirum shifts to a new level. One where quantity and price falls to the new level. There is a decrease in consumption due to external shocks, which is simply result of the bust cycle. As you are aware after the bust comes a boom. There is less consumption, but the less cost in labor creates an equilibrium, where there is no need for further cuts. Less consumption doesn't necessary lead to deflation. Remember, inflation and unemployment are inversely related based on the J-curve. Therefore, with the increase in unemployment, inflation is naturally supposed to fall.... which shouldn't lead to any kind of slippery slope cycle.
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You lost me on here. You're saying that less consumption doesn't necessarily lead to deflation, but everything you say after that results in lower prices (or at least a slowing of inflation)
quote:
Originally posted by Imran Siddiqui
If what you say is true, then every bust of the business cycle would result in a lack of equilibrium. However, this does not occur, even in areas without as many checks as the US has.
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Good point, and my repsonse is, uhm, I don't know. 
quote:
Originally posted by Imran Siddiqui
Basically, when inflation falls, interest rates rise, and there is greater incentive for investment.
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Don't you mean interest rates fall?
quote:
Originally posted by Imran Siddiqui
This is the natural market force that pulls economies out of busts. More investment eventually leads to more jobs in the recovery period.
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Doesn't Keynes' general theory showed that there can be situations where declining interest rates will not lead to increased investments.
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Imran Siddiqui
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The Potterverse
Jan 1970
time: 00:19
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quote:
You lost me on here. You're saying that less consumption doesn't necessarily lead to deflation, but everything you say after that results in lower prices (or at least a slowing of inflation) |
Deflation refers to going beyond 0 (negative). Because a lessening of inflation isn't going to lead to anyone cutting more people. Though falling below 0 just might.
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Don't you mean interest rates fall? |
Yes... sorry, misposted. Interest rates are there to account for inflation, so they would fall if inflation did.
Though, for some reason that sounds wrong. I mean, Greenspan raised rates to decrease inflation. Hmm... I think I've confused myself  .
Well, I guess if you raise rates, then there is less investment, which means the money supply is low, which leads to less inflation? That sounds right . Fiddling with interest rates messes with investment, which then changes inflation.
Ah... bugger.
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Doesn't Keynes' general theory showed that there can be situations where declining interest rates will not lead to increased investments. |
I'm not entirely sure. I have to get my brain straight for one now .
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Adam Smith
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Maryland, USA
Jan 1970
time: 00:19
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A few quick comments.
First, the quality of the debate on this thread is much better than usual. There are some posters I have not seen before, and some people actually appear to be familiar with facts to back their positions. 
Question: If raising the minimum wage is ecnomically beneficial, why not raise it to $50 per hour as Asher suggested? Answer: because, overall, it is not economically beneficial. We have now established the direciton of the trend. The only issue is the magnitude. (See below)
Why did Henry Ford pay $5 per day wages, which were unheard of at that time? Because his huge new plant at River Rouge exhausted the local supply of skilled and unskilled labor, and he had to attract workers from other parts of the country. This was the start of the Black migration to big northern cities in the 1920's. (People like A. Philip Randolph also had something to do with it.)
Imran:
Reducing the minimum wage will NOT get us to zero unemployment. Even if the wage went to zero, some people would still be unemployed because they do not have needed skills, or it is not in their economic interest to pay transport costs to get to distant jobs.
Moral Hazard:
Kudos for knowing about the Card/Kruger study. The problem with the Card/Kruger study was that they interviewed fast food managers and asked them how they expected the number of hours would change if the minimum wage increased. Kevin Murphy reran the Card/Kruger study using the actual employment records before and after the minimum wage increased. Using the actual data reversed Card and Kruger's findings, and showed pretty much what the vast majority of other studies on the minimum wage in the US showed: a ten percent increase in and effective minimum wage reduces employment by about three percent.
Spiffor:
The perfectly competitive model is a polar position from which to start analysis of a market. (Monopoly or monopsony is the other pole.) Every single last assumption does not need to hold in order for economic predictions to be valid. If one assumption does not hold, you don't throw out the entire model and economics with it. You make adjustments. And in this case the necessary adjustments make little if any difference to the conclusions.
Its late. I'm going to bed. Good night.
Adam Smith
Old posters never die,
they j.u.s.t..f...a...d...e...a....w....a....y....
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Spiffor
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CPA - Evil Clone brigade
Nov 2001
time: 06:19
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Adam Smith :
Basically, my main concern is the true economy rather than pure theory. Of course all liberals are not blindly supporting their perfect model, but the tries to connect the model to the real world (such as expressed in the new classical macroeconomy) tends to weaken the model, as plenty of exceptions are found. The perfect equilibrium is hurt.
My main problem with the liberal economics is that it's only concerned by a purely financial logic, whil economy is much more than just figures : it has to do with the human being, someone prone to mistakes, someone who acts with his heart, or who acts like society learned him to do. As long as economy thinks with the homo oeconomicus rather than with the human being, as simperfectly studied by psychology and sociology, it cannot understand the deep causes of economy.
There are 2 reasons I'm rather keynesian : I fundamentally think a company will produce only if it's incited to do so (demand oriented theory), but alos because there is a modesty in the keynesian theory, an opening to mistakes. There aren't many "perfect" things in the keynesian economy, and the "perfect" mechanisms seem dull to me (like the accelerator). Although I should be oriented towards a marxist approach, I truly dislike Marxist economics, as it is purely theoretical, perfect and disconnected from the real world (saying that profit only comes from the labour and not from the investment, thus reducing the impact of technological progress). In this way, marxist and liberal approaches resemble to each other.
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Imran Siddiqui
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The Potterverse
Jan 1970
time: 00:19
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(Sorry, missed this post)
quote:
Thank you for showing your faith. You really must have a strong belief to say this so boldly. Ah, maybe you don't know about the works of Gary Becker (it's more sociological) but he applies the rationality to everything in the social life : if you want a girlfriend or a child, it's rational ! What a wonderful world |
I'm familiar with Becker, and his ideas on cost-benefits for having children. I agree. In our minds we do cost-benefit analysis for everything.
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You seem to forget that companies earn a profit from their activity... Except in a Perfect Competition system, where profit = 0. But... Did you already talked to a businessman ? Talk him about zero-profit and watch him laugh |
Well, there is really no Perfect Competition system so production really isn't where Marginal Revenue meets Marginal Cost. And capital was only an example, I didn't mean to say that I was going to tell you ALL of the determinants of price and quantity .
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There is nothing explaining the relationship between companies, to explain why the changes on one market can deeply affect other markets |
Two Supply and Demand curves then .
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V. Hayek's ideas are responsible for the Hoover's catastrophe, while Keynes' ideas saved the day. |
Hoover catastrophe? I didn't know that he was responsible for the Federal Reserve following a tight monetary policy during the recession .
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Friedman is just another Guru saying that people are rational |
Yes, and I believe that people are rational (in both economics and international relations... both make the claim). Prove why they aren't .
Some of Keynes' ideas do have merit, but plenty of them really are dead wrong.
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Adam Smith
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Maryland, USA
Jan 1970
time: 00:19
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Rationality can mean a bunch of different things.
For people like Becker, all decisions in life, from brushing your teeth to selecting a mate (or deselecting a mate  ), can be explained by a fully laid-out economic theory. I think his work is creative, and comprehensive, but not at all convincing, and not usually what neoclassical economics has in mind when talking about rationality.
For people like Lucas and Sargent, rationality means that all economic actors know the full economic model, and all implications of any action that any other agent might take. For example, all consumers "know" that if a Democrat is elected, the money supply will expand, and inflation will result. This theory is known as rational expectations. It leads to a "now you see it now you dont" type of economic model: any action that the government could take is already anticipated by economic agents, and so will have no effect. Only unanticipated actions (crop failures, new technologies, oil embargos) have any efffect on the economy. While the results of some actions might be anticipated, I dont think this is a particularly convincing model. The reason is that it costs agents time and money to assemble the information and understand the implications of the underlying model. If economists cant get it right after studying economics full time, what makes you think individual agents can get it right?
Neoclassical economics usually defines rationality as a minimum set of axioms which agents need to follow in order for the theory to work. IIRC, if you strart with three basic axioms for agents, then you can derive the rest of microeconomics from that. The axioms are
1. Agents can compare any two bundles of goods, A and B
2. Either A preferred to B (A > B), B > A, or A = B
3. If A > B, and B > C, then A > C.
(Note that axioms are assumptions about the behavior of agents. They are not the same as assumptions made abotu the operation of individual markets, as discussed above.)
Vernon Graham, who won the Nobel Prize a couple of years ago, did a lot of work testing these assumptions on groups such as pigeons, drunks, and college students, which you might expect not to be "rational". He found that the basic assumptions held up even in these groups, which suggests that the underlying theory is fairly robust.
edit: typos
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Spiffor
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CPA - Evil Clone brigade
Nov 2001
time: 06:19
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quote:
The general neoclassical theory that people are rational can not be proved or falsified as a whole. |
I totally agree. It's exactly what I think when I'm saying "it's a matter of belief"
quote:
Vernon Graham, who won the Nobel Prize a couple of years ago, did a lot of work testing these assumptions on groups such as pigeons, drunks, and college students, which you might expect not to be "rational". He found that the basic assumptions held up even in these groups, which suggests that the underlying theory is fairly robust. |
Since I studied the scientific method in social sciences, I have no faith anymore in any scientific work. It's way too easy to prove what you want to prove, just by choosing the right method, and by selecting the right data. I'm not telling Vernon Graham lies, I'm just telling that any scientist who doesn't believe in rationality can prove the opposite, just by using another method and other data. I stand still that rationality is unprovable.
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Imran Siddiqui
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The Potterverse
Jan 1970
time: 00:19
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quote:
Neoclassical economics usually defines rationality as a minimum set of axioms which agents need to follow in order for the theory to work. IIRC, if you strart with three basic axioms for agents, then you can derive the rest of microeconomics from that. The axioms are
1. Agents can compare any two bundles of goods, A and B
2. Either A preferred to B (A > B), B > A, or A = B
3. If A > B, and B > C, then A > C.
(Note that axioms are assumptions about the behavior of agents. They are not the same as assumptions made abotu the operation of individual markets, as discussed above.)
Vernon Graham, who won the Nobel Prize a couple of years ago, did a lot of work testing these assumptions on groups such as pigeons, drunks, and college students, which you might expect not to be "rational". He found that the basic assumptions held up even in these groups, which suggests that the underlying theory is fairly robust. |
 Good to have a good economist on this thread to explain the things that I knew but have forgotten .
And yeah, that form of rationality I see as being pretty convincing. I don't think a person would pick C > A if they actor considers A > B and B > C in terms of utility.
But I also like Becker... a bit more... well, philosophical as well 
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29-04-2002 07:15
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