Saturday, March 1, 2014


Excerpts from JW Mason's Work, Unemployment and Aggregate Demand.

As soon as you being to think about employment in terms of an input of labor to a production process, you've taken a wrong turn. We should not try to give supply-based explanations of unemployment, i.e. to show how the allocation of some stock of productive resources by some decision makers could generate unemployment. Unemployment is strictly a phenomenon of aggregate demand.

That paragraph gave me pause. I always think of labor as a factor of production. But I figured it out. I don't think of "labor as a factor of production" as having anything to do with employment or unemployment. It's a cost category. That's what Adam Smith was pointing out.

"Unemployment is strictly a phenomenon of aggregate demand," Mason says. Reminds me of Okun's law. I'm okay with that.


So when we see people unemployed, we should never ask, why does the production of society’s desired outputs no longer require their labor input? That is a nonsense question that will lead nowhere but confusion. Instead we should ask, why has there been a fall in planned expenditure?

And that question brings us back to cost. Cost categories. Factors of production.


The tendency to talk about unemployment in terms of why some peoples' labor is no longer needed for production, is symptomatic of a larger confusion. This is the confusion of imagining money claims and payments as a more or less transparent representation of physical and social realities, as opposed to a distinct system that rests on but is substantially independent from underlying social and biological existence.

I wouldn't have said it that way, but "imagining money claims and payments as a more or less transparent representation of physical and social realities, as opposed to a distinct system" is most definitely a problem. We have to separate out and deal with the problems of the monetary system, apart from the other.


When I write the words "monetary imbalance" I am separating out and dealing with the monetary system, and identifying the problem. When I use the phrase "excessive reliance on credit" I am providing detail.

When I refer to "the factor cost of money" I am identifying the cost that makes monetary imbalance a problem. I am adding that cost to the list Adam Smith came up with: wages, rent, and profit. I am showing that the cost of money competes with those other factors, leaving less money for wages and profit.

"Excessive" reliance on credit means that the factor cost of money is excessive relative to the other factors.

How can you know whether the reliance on credit is excessive? Before the crisis you can know, if finance is the best-performing sector of the economy. You can know, if there is too much debt. And you can know, if it is a financial crisis that brings the economy down.

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