Involutionary Unemployment: Macroeconomics From a Keynesian Perspective.

The classical vision of macroeconomics found its most famous expression in the dictum "supply creates its own demand." This view, popularly known as Say's Law, denies the possibility of general overproduction or underproduction. With the exception of Malthus, Marx, and a few other heretics, this view dominated both classical and early neoclassical contributions to macroeconomic theory. The essential feature of Keynes's contribution was his reversal of Say's Law. In Keynes's model demand creates supply providing an economy has spare capacity.

During the past twenty five years we have witnessed an attempt to discredit and overturn Keynesian economics in all its many forms. New classical macroeconomists inhabit a brave new world characterized by continuously clearing markets, rational expectations and optimising agents who live in permanent equilibrium having exhausted all mutually beneficial trades. In such a world the business cycle is always an equilibrium phenomena generated either by the misperceptions of agents in the face of nominal demand shocks, an approach pioneered by Robert Lucas in the 1970s, or, as a consequence of real supply side forces such as recurrent technological shocks, an approach associated with Finn Kydland and Edward Prescott during the last decade. This latter approach is profoundly shocking to both Keynesians and monetarists alike. The traditional approach which distinguishes between potential and actual output is abandoned since aggregate fluctuations are seen to be the result of shifts in the former. Since the observed business cycle is nothing more than the outcome of Pareto efficient responses to technological shocks policies designed to tame the business cycle are not only out of place but counter productive and welfare reducing. Since the unemployed as well as the employed are in equilibrium throughout the observed fluctuations in economic activity there is no place in such models for one of Keynes's most important "theoretical constructs," namely, involuntary unemployment.

In this new book James Trevithick has done an admirable job in re-examining the contribution of Keynes and in providing a powerful re-statement of the fundamental tenets of Keynesianism. In Trevithick's view, the burial of Keynes and his advocates during the late 1970s was premature to say the least. Of course one would expect nothing less from a fellow of Kings College Cambridge, and Trevithick takes on the mantle of being one of Keynes's spiritual heirs to provide an eloquent defence of macroeconomic theories where involuntary unemployment occupies a central place.

A principle objective of Trevithick's analysis is to answer the important question "what is a Keynesian and how does a Keynesian differ from a monetarist or a new classical macroeconomist?" This reviewer shares the author's view that the answers to such questions cannot be given in a historical vacuum. Different theories of macroeconomics arose out of dissatisfaction with the shortcomings, real and imputed, of the dominant paradigm of the time? For this reason Trevithick deplores the modern tendency to neglect the history of economic ideas in the undergraduate curriculum. In his view "nowhere is the need for a sense of the history of economic ideas more pressing than in the current debate on the state of macroeconomics."

With this general philosophy in mind, James Trevithick has structured his book in such a way that it will prove an invaluable addition to the library of both students of the history of macroeconomic thought as well as those trying to comprehend and form a balanced judgement of the relative merits of the rival theories which have emerged during the last quarter century. To this end the author critically examines the "Old Classical Macroeconomics," "The Quantity Theory and its Descendants," "The Keynesian Revolution," "Keynes and the Labour Market," "Inflation and the Labour Market," "Rational Expectations and the New Classical Macroeconomics," and "Recent Developments in Keynesian Macroeconomics."

It is apparent from this book that Trevithick is highly critical of the theoretical ingenuity displayed in the various contributions of the new classical school. Since in this approach it is axiomatic that market economies are characterised by a continuous state of full employment Keynes's elasticity analysis is "ruled out as irrelevant" and the qualifications and reservations which monetarists of the old school expressed with respect to the short run impact of monetary disturbances are swept aside. At the heart of the new classical monetary theory of the business cycle is the Lucas surprise supply function. In Trevithick's opinion this construct is "an arbitrary concocted mishmash of conjectures and suppositions" with hypotheses "effortlessly improvised out of thin air." With the arrival in 1975 of the policy invariance proposition the reaction of those Keynesians who had managed to withstand the initial new classical onslaught was a mixture of "glacial disdain; head scratching; incredulity; stoney, deafening silence; and deep shock". However, the author at this stage is perhaps less than generous to the new classical school. As Trevithick later admits, "the rational expectations hypothesis is ideologically neutral" and "does not pose a threat to Keynesian theory in the way that was thought to be the case when it first entered macroeconomics".

Indeed it is extremely unlikely that the recent contributions of the new Keynesian school could have occurred without the prior penetrating challenge to orthodox Keynesian models which Friedman, Lucas, Barro, Sargent and others had contributed. Unfortunately the authors coverage of recent developments in Keynesian theory is, by his own admission, rather selective. A major deficiency here is the neglect of efficiency wage theory which has been a prominent development in the literature. However, on the positive side Trevithick gives extensive treatment to hysteresis effects, insider-outsider theory, and the impact of implicit contracts and customer markets.

The publication of Involuntary Unemployment could not have been more timely. With unemployment in the U.K. economy forecast to rise to 12 per cent by mid 1993, does it make sense to look for answers to this very real problem to theories where unemployment is viewed as a voluntary welfare enhancing leisure activity or, alternatively, is due to unexplained bouts of contagious laziness which at present has an international dimension? This reviewer suspects that a substantial proportion of the unemployed on both sides of the Atlantic are not comfortably resting in equilibrium on their supply curves, a view shared by James Trevithick and so well articulated in this excellent new book which deserves the attention of economists everywhere.