Timmy elsewhereMarch 9, 2013 Tim WorstallTimmy Elsewhere12 CommentsAt the ASI. Why do all the people who say we should be more like Germany complain when we\’re more like Germany? previousHow amusing. Ha-Joon Chang proves that fiscal expansion won\’t worknextRegarding Sr. Chavez 12 thoughts on “Timmy elsewhere” Ian B March 9, 2013 at 11:50 am So, over the next decade pay rises for German labour were deliberately limited. By all sides: unions and companies and government. And the system worked. So, what you’re advocating here is some kind of system in which you limit, say, bonuses, yes? Steve March 9, 2013 at 1:20 pm Ian – He says in the article that he isn’t advocating we adopt the German system, and that we can’t, for UK unions won’t support lower wages. Ian B March 9, 2013 at 1:36 pm Nonetheless, he seems to be advocating (or at least claiming the Germans had success with) a wages policy of the kind that we all know doesn’t actually work. This is why the Austrian school recommend against econometrics. You can always find some example, in some time and place, where some policy and apparent outcome are correlated. Randomly. And then say, “that proves that X works”. There isn’t an aggregate “price of labour”. It isn’t a commodity. Please, everyone take their copies of The Wealth Of Nations and its sequel, Das Kapital, and burn the fuckers. Please. Dave March 9, 2013 at 3:57 pm Ian B> I’m rather baffled as to why you suggest that reducing labour costs won’t work to reduce labour costs. Seems pretty obvious to me that it must do. Or are you arguing that reducing labour costs does not, other things being equal, improve productivity? Ian B March 10, 2013 at 12:55 am Or are you arguing that reducing labour costs does not, other things being equal, improve productivity? Yes, basically. This is one of those situations in which what works at the micro level doesn’t work at the macro level. I always think one easy way to help visualise this stuff is to imagine a fixed national money supply (“a heap of gold pieces”) and then imagine trying to cut *everybodys* income. It’s impossible. The money supply has to equal the total value of production (over some time period where V is normalised to 1). So you have to pay out the same amount of money as incomes regardless. You can’t cut the aggregate income. It simply cannot be done. To be Ricardian about it, if you did manage to cut all the “wages” in the economy, you’d just shift more of the national income into “profits” and “rents”. Your prices, and thus “productivity” (as defined in a macroeconomic monetary manner) won’t change at all, though you’ll probably end up shifting consumption from things “labour” buys to things “profiteers and rentiers” buy. In economic terms, you are locked in with your national currency. You can’t change how much of it gets paid to people, because that has to be all of it. So, you’re just shifting who gets it. Ian B March 10, 2013 at 1:08 am The famous example was of course the 1970s. Labour tried expanding the money supply while implementing a wages policy, so the price of labour should have fallen and made us more competitive. What actually happened was rising unemployment, falling [aggregate] output and inflation, the famous “stagflation”. Matthew L March 10, 2013 at 2:03 am Ian: But doesn’t the Euro confound that analysis? Ian B March 10, 2013 at 2:10 am Why? Matthew L March 10, 2013 at 2:13 am Well it’s not a fixed national money supply, it’s a fixed regional money supply. By changing wage policies you can steal a bigger share from, say, France. I don’t know, this is more of a question than a disagreement – I haven’t thought about it in detail. Ian B March 10, 2013 at 2:29 am Hmm. Well, we’re doing that experiment here in our own currency area. Most of the money supply, and the highest wages are in the South East. This doesn’t appear to be causing the regional hinterland to boom. We seem to have the opposite effect, in which commerce is sucked into the Bubble and only a constant transfer of money to the regions via government keeps them afloat. They don’t appear to be beggaring London with their low wages and prices. Roue le Jour March 10, 2013 at 6:55 am In a large part because their wages aren”t low enough. A large part of the regions” wages are national public sector pay scale or national minimum wage. Ian B March 10, 2013 at 10:01 am Public sector wages aren’t relevant here (not in the market) and the national minimum wage is already derisorily low. How much lower do they need to go before this magical effect kicks in? There is already a well known large differential between wages and prices in London compared to the hinterland. Why isn’t this having the predicted effect? Leave a Reply Cancel replyYour email address will not be published. Required fields are marked *Comment Name * Email * Website Save my name, email, and website in this browser for the next time I comment.