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Lektion 1, Thema 1
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The new models

History strikes back  

Over time, the Keynesian theses acquired great influence thanks to the fact that they immediately showed much greater capacity than the Neoclassical ones to deal with the economic phenomena of the time. However, none of the successive updates to the original Keynesian model provided sufficiently powerful answers, theoretically and politically, to the problems that emerged throughout the 1970s and 1980s.

Keynesian policies had provided satisfactory solutions during the expansionary growth years of the postwar period, but they would become truly ineffective in the face of a new type of recession of the last decades of the 20th century. The combination of high levels of unemployment brought into question the Keynesian use of economic policies. The internationalisation of economic relations collided with the analysis of demand in closed economies. The productivity crisis that forced the technological reconversion and the surge of a very deep distributive conflict that made it impossible to approach employment regulation as one more dimension of income policy, were obstacles that the original Keynesianism was not in conditions to solve. As happened to the Neoclassical model, reality also took a heavy toll on the Keynesian school of thought.

 

Friedman’s return to (neo)classic 

In the 1970s, high rates of inflation and unemployment appeared simultaneously. This necessarily resulted in an alteration of the bases of understanding of the phenomenon of unemployment and, with it, of the theoretical explanation of the functioning of the labour market. At the macroeconomic level, this explanation was transferred to the concept of the “natural unemployment rate” initially developed by Milton Friedman (1968), founder of the monetarist school whose main ideas stated the rejection of the basic relationships of the Keynesian model. 

In the new economic conjuncture, stagflation (persistent high inflation combined with high unemployment and stagnant demand), became the new dominant paradigm. Friedman returned to the more radical implications of the Neoclassical model about the limited viability of expansionary demand policies (State’s incentives to investment demand) to reduce unemployment below its equilibrium level beyond the short term. The existing unemployment rate will be the natural unemployment rate and the economy will always find itself in a general equilibrium situation of full employment. Understanding, again, that this effective unemployment rate, which does not necessarily have to be zero, will correspond to voluntary unemployment.

In reality, the concept of the natural rate of unemployment is just a renewed version of the neoclassical idea that there are certain equilibrium levels of real wages and employment in the economy that cannot be altered through alterations in prices. The normative proposition that derives from this is evident: to achieve increases in the level of employment it is only possible to act by reducing the wages of the workers.

 

Neoclassics’ school revisited: the theory of human capital 

With the progressive return of Neoclassical theory, there is an intense and parallel revision of its approaches to the labour market, whose limitations become more and more evident when confronted with reality. The lack of homogeneity both in the labour supply, that is, in the qualification of workers, and in the labour demand led to the elaboration of what can be considered as the main contribution of the Neoclassical school to labour economics: the theory of human capital.

This theory suggests that the heterogeneity of workers is the result of the different degrees of investment that they make in their training and qualifications improvement. Heterogeneity is, therefore, the result of an investment process: investment in human capital. The analysis is posed from the beginning, in the field of individual decisions, based on the hypothesis that the subjects have the capacity to choose both the amount of work they are willing to offer and the quality of that work, which will depend on their prior decision to invest in a specific type of training.

This revision leaves aside the traditional neoclassical conception of labour as a commodity without other specific connotations beyond being carried out by human beings, as Alfred Marshall would argue. The striking difference and the new neoclassic  “miracle” is how on their journey back to the origins, this theory managed to make labour disappear, even as a commodity, turning it into capital.

In any case, unemployment comes to be understood as something that originated and resolved in the field of individual decisions, it is a specific problem for each subject, and not a social problem. The diagnosis of unemployment involves mainly insufficient or inappropriate investment in training, and therefore the regulatory proposals in this analysis refer to the field of educational policies rather than to those of the labour market. 

 

Institutionalism and new Marxism

Following the logic that runs through all Neoclassical variants, institutions and regulations are nothing more than rigidities that keep markets away from perfect competition and cause situations in which the real wage is excessively high compared to the other conditions of the product and labour markets.

Confronting these ideas, the institutionalist current aims precisely at highlighting the importance of social and institutional influences on the behaviour of agents and, therefore, on the evolution of wages, employment and unemployment. Unlike what happens in the neoclassical model, this currently considers institutions as endogenous variables. From a much more descriptive than analytical perspective, the institutionalist authors consider that the forms of industrial organisation, the existing conditions in the goods market, the available technology, the strategies of business control or labour market regulations, play a determining role on the structure of that market. A market that, on the other hand, is neither unique nor competitive in nature, but rather has a fragmented and imperfect structure.

The labour market would thus be made up of various non-competitive segments and with differences in their remuneration levels and working conditions as a consequence of their “dual” nature and not only of the different levels of education and training of workers. According to this “dual” vision, the functioning of the labour market could be explained starting from the idea that it is divided into two large segments: the primary market (which would encompass the good jobs in the market, that is, those with high salaries, stability, opportunities for employment advancement, among others) and the secondary market (jobs with low wages, instability, few opportunities for advancement, and so on) would be confined.

This theory is based on the idea that a series of social factors and, especially, demand factors, had caused, over time, a dualization of the labour market. At the same time the relationship between education and work is governed by this duality, where the institutional structures that are more or less stable over time (for example, barriers to access to the university, or the socio-cultural profile of the student, or family influence at the time of choosing the race) also condition the labour supply side. In short, this theory assumes that society is institutionally structured, that is, conditioned by habits and rules that govern the production and distribution of wealth.

Along with institutionalist theories, another set of different theories that derived with unequal fidelity from original Marxism, constituted the other alternative to (new)Neoclassicals. The fundamental point of confrontation between Marxist and neoclassical theories is the distinction between the concepts of labour as a commodity that is bought and sold in the market (neoclassic); and the concept of labour as a factor of production that is incorporated into the production process (Marxist).

Now, from the original Marxist approach, centred on the aforementioned distinction, different readings on labour and the dynamics that govern it have been drafted by neoMarxism. All of them agree, however, that in order to detect the determinants of the volume of employment or unemployment in an economy and the guidelines and rules that govern the distribution of income within it, contextual factors must be analysed and not only those that given in the markets: the specific working conditions, the hierarchy inherent in wage labour, the control mechanisms articulated to convert labour power into effective labour and, in general, the general conditions of the capitalist economy at a given moment. In short, labour relationships are not only a market relationship but a social relationship.

 

Feminist economics

Feminist economics is one of the current movements for pluralism in economics that has been acknowledgd by the mainstream of the profession. It highlights issues which affect women that have not traditionally been recognised in a field dominated by men. Moreover, it seeks to carve out a space for women in the discipline, for fairness and diversity reasons and because it means that women’s issues are more likely to be considered. This theory rightfully argues that economic theory presents an historical male-centred bias. 

Feminist economists argue that women perform a lot of labour which goes unpaid and unnoticed but which keeps the economy, society, and individual families afloat. Unremunerated household work is not considered present in the labour market, plus the gendered expectations which push women into certain tasks and occupations, has historically put women in positions which have not been rewarded as much as men’s work both socially and financially. Furthermore, unpaid labour doesn’t stop at home, though. The ‘emotional labour’ performed by women at work as women are expected to do less important, menial tasks that do not advance their careers but are necessary to keep the workplace going. These range from literally doing the housework in the office – keeping the place tidy, bringing in food – to taking minutes, supporting others, creating schedules and the like. 

Women have historically performed large amounts of labour which is rendered invisible by social and financial conventions, and economic theories and schools have failed to recognise this. Better data and an incorporation of these concepts into economists’ and society’s ideas of ‘labour’ would be a huge step forward.

Ecological economics 

Neither classical, neoclassical, Marxist or Keynesian schools of economy have acknowledged the problem of economic scale. All of them have always valorized economic growth, as at the time they were developed environmental problems were not of real concern. Ecological economics’ most important contribution is the argument that the human economy is a subsystem of the finite earth’s natural life-support system. Implied in this argument is a new metric of economic health, the life-value rather than the money-value of that which economies produce and distribute.

In recent decades we have understood that climate change and air pollution are major environmental issues which affect us all. The main tension point is that although regulations like green energy policies can lead to notable environmental improvements and health benefits, they also impose additional production costs on firms, especially in sectors exposed to trade and intensive in labour and energy. 

However, ecological economics schools argue that the benefits of such environmental regulations are likely to outweigh any costs. Green growth policies aim at improving environmental quality and economic growth at the same time. A successful transition towards green growth can create new opportunities for workers, as job creation can be achieved in a number of economic sectors with low emission intensities, while job destruction occurs in emission-intensive sectors. 

Most probably in most countries, job reduction in the central scenario will affect ‘Blue collar and farm workers’ the most. This job category is largely employed in energy sectors and energy-intensive industries, which are the most impacted sectors. Workers in the categories ‘Service and sales’ and ‘Managers and officials’ generally benefit most in terms of wage income, since these job categories are more represented in sectors that are the least affected by the policy (such as services).

The success of green growth policies depends on the capacity of the firms and workers to adapt to the changes in economic structures induced by the policies. Further knowledge of the job categories that are most vulnerable when implementing green growth policies is fundamental to adjust education and training policies, as well as redistributive schemes that will accommodate the green growth objectives.

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