Say you’re a Keynesian, what would be your response to this example?
Say you have two economies. One has an average wage of x, and the other has an average wage of 2x. These are in nominal terms, but they use the same currency. These economies are completely isolated from each other. The first economy is a completely free economy. The second economy has half of its workforce digging holes and filling them back up again. However, the higher wage is acquired through very high wages for those digging jobs. Keynesian explanations would say that the second economy is better, but obviously the first is because they are producing more and so there are many goods to choose from at good prices. How would a Keynesian respond to this criticism?
the situation you put is very vague but a typical Keynesian response would be that since the second economy, the wage with 2x, has more money in wages, people have more money to consume more…
That’s really a false premise. Really that’s not the sort of scenario a Keynesian would be responding to because it’s the sort of nonsensical hypothetical that he would make up in the first place.
An economy that has half its population being paid for not doing anything (if you’re going to pay them to dig holes and then fill them up, you may as well pay them to sit around) is, ceteris paribus, not going to be as productive as the other economy. And an economy that is half as productive could not possibly maintain an average wage that is twice as high. That makes absolutely no sense. This is a classic example of how easy it is for people to fall into this trap of disassociating wages with production. Think about what that scenario is saying…you’re half as productive, meaning there’s half as much stuff, but somehow everyone has access to twice as much stuff. The stuff isn’t fricking there.
You may as well just say the entire population doesn’t perform any work at all and their wage is 2x, and the other population is at full employment and their wage is only half that. It would be just as realistic…which is namely, not at all.
“[in an unproductive economy] do we need labor unions to get your pay to go up 10 times? What would that help, if there ain’t no stuff to buy anyway? What if we paid you a hundred trillion Zimbabwean dollars, would that help the situation? If there ain’t no stuff to buy, it doesn’t matter, your wages can keep going up and up and up…the problem is the stuff isn’t there.”
