Commentary on Political Economy

Thursday 30 June 2011

Discussion on "The Paradox of Toil"

This is our discussion of a paper on "The Paradox of Toil" that was deleted by the FT Editors from the Gavyn Davies Blog. It is illustrative of how general equilibrium analysis distorts our entire perception and understanding of how a capitalist economy works, and why. That paper by Gauti Eggertsson is here:
On the "paradox of toil" proper: - Is that not the perfect argument for starting to plot a revolution anyhow? "The nature of work": how we produce, what we produce and how we apply the product": that is what we need to change!

The discussion of "the paradox of toil" that I mentioned concerned precisely this fact: that Krugman and Eggertsson (the latter is also at Princeton and certainly at the Fed) "work" from within the present constraints of what capitalism takes to be "work", namely, that work has to be "profitable". It is entirely obvious that, given the fact that "profitability" is nothing more than "political control over workers", if existing employees work "more", given the assumption that they would not be able to work "more" unless their work was "profitable", the consequent constriction and reduction of "demand" or consumption on the part of those who are out of work would tend to reduce the share of "profits" that go into the expansion of employment through new investment!!

Hence, the "paradox" is not one that applies to "economics" in absolute - but rather and crucially one that applies to a capitalist economy - which is the "economy" that we have now, not necessarily the ONLY "economy"! As Eggertsson rightly notes, this is the obverse of Keynes's "paradox of thrift" - if everyone saves, there will be less for everyone to save! Obversely, if existing employees "work more", there will be less "income" going to the less employed - and because consumption (spending) declines as incomes rise... there will be less aggregate demand, more aggregate "saving" and therefore less "investment" and "employment".

Of course, there are a number of assumptions here - the most important being that it would be "unprofitable" for capitalist firms to expand employment because the greater production from existing workers working "more" could not be sold... "profitably"! The "Keynesian" nonsense lies all in this: that we are told that we (the workers) would not be able "to consume enough" even if capitalists decided to invest and produce more!! The idiocy of this thinking is too bestial to contemplate!

And this is the argument Eggertsson makes. Here it is from the "Conclusions" section in the Eggertsson paper - read carefully, please:

"The logic is that the increase in labor supply lowers aggregate wages, which in turn gives the worker lower income to spend on goods and services. These deflationary pressures increase the real interest rate, and this cannot be offset by the central bank cutting the nominal interest rate. Thus less goods are demanded.
 Because the firms will employ labor only to satisfy any consumer demand for goods, this reduces aggregate employment. Why does the same logic not apply under normal circumstances? The reason is that, normally, when there is an outward shift in supply and downward pressures on wages and prices, the central bank will offset this by cutting of the nominal interest rate by more than one-to-one ratio because φπ > 1 in its policy rule. Hence, the real interest rate will decrease, making spending today cheaper and increasing output and employment. At zero interest rates, however, this is no longer possible due to the zero bound. Hence the paradox."

Now, notice THE CONJURING TRICK that these economic geniuses (who can't see farther than their bourgeois noses!) come up with...


What Eggertsson is saying is that "because we produce more", the capitalist firms that "appropriate what workers produce" will not be able "TO SELL THE GREATER PRODUCT BACK TO US"!! - because it is not profitable to do so given that interest rates are already at "the zero bound" - in other words, capitalist investment.... IS ALREADY UNPROFITABLE!!

AS A RESULT (!!) capitalist firms will not expand output if workers offer to work longer: ON THE CONTRARY, as Eggertsson puts it,

“[t]he negative shock ψt (people want to work more), and the expectation that it will persist, puts immediate deflationary pressure on prices in the AS equation (the right-hand-side equation in the figure) because it lowers the wage cost of firms.”

THEREFORE, the increase in “toil” offered by workers will result, at best, in a reduction in aggregate employment (whether through loss of jobs or through more “flexible employment”). QED

Game, set and match! Nominate me for a Nobel, people - it takes THAT MUCH intelligence to get one, I assure you!!

An afterthought: it is obvious from all the foregoing that Eggertsson’s "paradox of toil" exists ONLY if we accept the assumptions of his "general equilibrium model"!! In other words, these complete and utter MORONS who pride themselves in the appellation of "economists" see a "paradox" in reality where NONE EXISTS were it not for their ABSURD assumptions built into "general equilibrium analysis"!! My proposal is therefore that we demolish both the analysis and the reality that these loons IMPOSE on us!

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