I’m currently writing my review of W.H. Hutt’s The Theory of Idle Resources — slowly but surely, since I’m swamped with other work. While I think Hutt’s 1939 monograph is a great contribution to the literature, I feel as if he didn’t adequately address the concerns brought to the forefront of economics by J.M. Keynes’ The General Theory. I recently came across something that embodies my reservations: Pavlina Tcherneva’s ‘economists for Romney’ critique. Specifically, her words on R. Lucas’ rational expectations model and its implications for the labor market,
Perhaps no one bears more responsibility for the general apathy among mainstream economists towards the problem of unemployment than Robert Lucas. He is the economist who argued that there was no point in distinguishing between voluntary and involuntary unemployment because agents were ‘perfectly rational’ and the jobless essentially ‘chose’ their condition (1978, 242).
I haven’t read Lucas’ 1978 paper, “Unemployment Policy” (linked in the excerpt above), so I’m not commenting on the truth of that interpretation. But, it’s a similar argument that Hutt implicitly makes. In The Theory of Idle Resources, Hutt essentially blames labor unemployment on three things: ‘pseudo-idleness’ (imagine a wage-earning remaining unemployed expecting to find a higher wage elsewhere), preferred idleness (leisure > work), and monopolization. The latter tends to get the most blame when free-market economists try to explain phenomena such as unemployment-levels during the Great Depression, but growing amounts of evidence are suggesting that this isn’t the ‘proximate cause,’ as Hutt likes to write, of much of prolonged cyclical unemployment.
The closest thing that does come to a critique of what we may call the ‘sticky wages’ theory of idleness, although this isn’t Keynes’ unique criticism of classical employment theory, is what I interpret as a confusing critique of monetary disequilibrium theory. Somebody who knows W.H. Hutt’s work better than I do can comment and explain the relevant section to me, but this is how I understood pages 80–82 (even though here the context is monopoly). But, Hutt doesn’t really address the possibility of an ‘underemployment equilibrium.’ I don’t necessarily mean in the sense Keynes’ meant it, but maybe in the modern sense: where all firms’ employment needs are met at wage prices higher than those which would ‘clear’ the market in the classical sense.
Hopefully, I’ll go into further detail in the review, but it just doesn’t make sense to me to blame only either monopolistic regulations or workers’ preference (or the notion that unemployment insurance significantly aggravates the existence of ‘preferred idleness’). Situations of high unemployment, recessions, are characterized by the capability to recover given changes elsewhere — credit markets, for instance —, such that the employment situation can be resolved. By blaming unemployment on preference or interventions (including monopolies), we take away from other causes and aggravating variables. I suppose the unemployed person can employ herself manufacturing hand-made train models (‘disguised unemployment,’ as Joan Robinson would say?), but if productivity weren’t depressed due to a broken financial system maybe she’d find more favorable terms elsewhere.