Keynesians are obsessed with the “correct” parameters and models to “manage” the economy in an “appropriate” manner. Therefore, they are always looking for mathematical or statistical relationships between “things that matter” to politicians. Two of these things are unemployment and inflation. We are going to study their relationship and the stupidity of economists.
Once upon a time there was an economist called A.W.Phillips. He postulated (said) that there was an inverse relationship between inflation and unemployment. An inverse relationship means that when one goes up, the other must go down.
This is, of course, astronomically stupid. Consider what would happen if suddenly most of the workers went to their bosses and demanded a 100% raise or else. What do you think would happen? Yes, you are right. They would all be fired. Consequently, unemployment would go up. Common sense dictates that the higher the salary the higher the unemployment. There is no mystery. The more a business must pay for salaries, the fewer employees it can afford to hire. Simple common sense. Yet, Keynesians accepted the Phillips curve for many, many years and many, many political and economic decisions were taken based on it.
As decades went by and government spending reached unsustainable levels, inflation begun to climb and with it, unemployment. This is as common sense dictates. Inflation destroys the economy, the fewer businesses you have, the fewer employees you get. Again, simple common sense.
Enter clever economists. They postulated that there was a difference in how the Phillips curve operated between a “short term” and a “long term”. In the short term the Phillips curve was OK, while in the long term, it would operate in reverse, when the unemployment would return to its “natural state”. This natural state being, of course, higher than when inflation was low. This new-and-improved curve is called the “expectations-augmented Phillips curve” and this breakthrough took only about 20 years to discover. Yes, economists lack common sense… what else is new?
Anyhow, the next improvement was to claim that this “natural state” of unemployment was more or less constant given a constant inflation. This is, given a certain inflation, a certain unemployment level is unavoidable and constant. They called this new-and-improved “natural state” of unemployment the “nonaccelerating inflation rate of unemployment” or NAIRU.
Of course, any person out there on the street will tell you that unemployment depends of a million different factors and inflation is only one of them. It is plain idiotic to expect unemployment to be constant given a steady inflation. Not to mention the fact that in this modern world, there is no such thing as “stable” inflation. But, who are we to argue with Nobel prize winning economists?
Anyhow, this NAIRU thing was constant and taken as such, until some clever government bureaucrats decided to help themselves to a healthy dose of data and crunch some numbers and determine what this NAIRU would look like in the real world. Well… surprise… surprise… the constant NAIRU wasn’t constant at all! It changed with demographics, technology, union conditions, taxes, energy prices and pretty much everything else in the economic universe.
Surprise, surprise!!! The genius economists got it all wrong again. But then they decided that if there would be a way to create inflation without altering all these factors, then NAIRU should be constant. And if pigs could fly, they would be ducks!
Nevertheless, such a wonderfully sounding theory, let’s remember, the “expectations-augmented Phillips curve” is now part of any arsenal of any government-paid economist. Never mind it is nonsense; it sounds too good to dump! If you feel that your government is being advised by people following stupid ideas, now you know why.
But hold on. This is not the end of the story. Further down the road, these geniuses economists decided that there should at least be a tendency for the economy to return to the NAIRU… which was not being observed in the data. Never mind! It so happens that prices and wages are “sticky” and the return to the NAIRU level is slow, tortuous and you don’t see it in the data, but believe us it’s there.
Enter the “new Keynesians”. For them there is only a weak tendency for an economy to return to the NAIRU. This is called the “hysteresis hypothesis of the expectations-augmented Phillips curve in relation to the nonaccelerating inflation rate of unemployment”. Got that? Simple, right? They explain that once inflation goes up, NAIRU also goes up. And the explanation? The Unions!!! Yes, that’s right. The unions are to be blamed for high unemployment and high inflation!!!
We would really like to understand how did unions manage to print money to create inflation and how did they manage to control the unemployment level of an entire economy. Alas, it would seem that the unions are to be blamed because after a long period of layoff’s, remaining unionized employees would seek higher wages instead of higher employment. Never mind that unions always demand higher wages. Why would this make a difference now? We don’t know and we strongly suspect that they don’t either. The only explanation they provide is that it seems to work when comparing EU versus US, EU being more unionized than US. If this is the case, then we can also argue that the explanation is French speaking workers. In EU there are more than in US. There you have it! Proof positive! What a gigantic pile of nonsense!!!
The level of unemployment depends on the destructive power of inflation on businesses. The higher the destruction the higher the unemployment will remain even if inflation decreases. It takes a very long time indeed to re-build a healthy business ecosystem. It has absolutely nothing to do with unions!!!
Stupid, stupid economic ideas!!!
Of course, there are always new-and –improved versions of the Phillips curve being thought out by ultra-clever economists. One of the latest dictates that what is in a direct relationship is not unemployment and inflation, but the ratio between the actual GDP (Gross Domestic Product) and the “potential GDP” (the GDP being the hypothetical sum of all wealth produced in a country over one year) and inflation.
Considering that the GDP is a statistical figment of the imagination, we don’t even want to speculate as to what a “potential” GDP would be. But let’s play just for the heck of it. The idea goes as follows, if there is too much potential GDP the ratio decreases and therefore inflation decreases.
Potential GDP can only be generated by companies over investing. In other words, companies spent too much money in new plants and products, therefore, the price of their products remains constant. This is what in Latin is called “non-sequitur”. In other words, a nonsensical argument. Allow us to give you an example: I walk my dog through the park, therefore it will rain. Stupid right?
The issue is not that businesses overinvested. It is obvious that for those who did, they had to sell more products and therefore lowered prices, which in term lowered inflation rates. The issue is that all that newly created money that eventually gave rise to inflation, provided all the wrong signals to the businesses, which invested based on wrong economic assumptions. According to these signals, they did not over invest. When inflation finally begun its destructive process, the over investment became clear.
This theory of GDP ratio is stupid because it assumes that somehow if there is no gap (i.e. all businesses in a country are working at 100% capacity all the time) all this product will magically match all the new money that a government is creating and there would be no inflation at all!! But the truth is that there is no such relationship. Governments create new money out of thin air based on their own political needs and agendas, which have absolutely nothing to do with GDP measures!!!
This theory and all the others are simply plain stupid. They do not meet the common sense standard.
Now you know why economists are dangerous. They follow stupid ideas and recommend or impose actions based on such stupid ideas but expecting a wonderful result. You, me and everybody else pay the consequences.
This is why as Absolute Austro-Libertarians we do not believe in “managing” economies. When a system is optimized, any tampering only decreases its optimum performance, no matter how clever the mathematical or statistical model may be.
There is only one solution: absolutely free markets.
Strong medicine for a deadly disease. Sad but true. It tastes horrible, but it works. Take it or continue to be sick. Your choice.
Note: please see the Glossary if you are unfamiliar with certain words.
