Bourgeois Propaganda In The Teaching Of Economics

Economists, following a long-exploded, nonsensical theory, have a concept, the 'natural rate of unemployment':

"At any moment of time, there is some level of unemployment which has the property that it is consistent with equilibrium in the structure of real wage rates. At that level of unemployment, real wage rates are tending on the average to rise at a 'normal' secular rate.... A higher level of unemployment is an indication that there is an excess supply of labor that will produce downward pressure on real wage rates. The 'natural rate of unemployment,' in other words, is the level that would be ground out by the Walrasian system of general equilibrium equations, provided there is embedded in them the actual structural characteristics of the labor and commodity markets..." – Milton Friedman (1968), quoted in James K. Galbraith, Time to Ditch the NAIRU

This definition has a number of fatal problems. First, Walras' long run model is overdetermined and inconsistent. An equilibrium cannot be defined with a given endowment of a basket of capital goods, supply matching demand in every market, and the rate of profits (also known as interest) attaining equality in the production of all goods. So that model cannot provide a consistent definition of the natural rate of unemployment.

Second, mayhaps Friedman means to refer to the neo-Walrasian model of intertemporal equilibrium. But that does not work either. Labor services at each point of time are different commodities in that model. You can talk about a time series for unemployment, maybe, but not a natural rate in that model.

Third, empirical evidence shows that the labor market does not work like Friedman imagines. I turn to natural experiments on minimum wages. Andrajit Dube has a number of studies, with co-authors. Dube, Lester, and Reich (2010) is one. Firms do not tend to hire less labor services at higher wages, given the variation found in these experiments. At the macroeconomic level, estimates of the natural rate or of the NAIRU tend to fluctuate, following the actual trend in unemployment. In addition to the previously cited Galbratih article, I also cite Antonella Stirati’s recent Godley-Tobin lecture.

Fourth, the theoretical untenability of explaining wages by demand and supply, as understood in marginal economics, was demonstrated more than half a century ago. Pierangelo Garegnani (1970) is one good exposition.

If economics were a science, students would not have been taught about either the so-called natural rate of unemployment or the NAIRU, for decades. At least, if they were taught so, maybe in a history of thought class, they would also be taught, at least, some of these objections.

I now turn to a web site that purports to provide a tutorial for the student. I find very little about these theoretical and empirical objections in this page. But I do find this:

"To reduce the natural rate of unemployment, we need to implement supply-side policies, such as ...

• ... Making labour markets more flexible, e.g. reducing minimum wages and trade unions.
• Easier to hire and fire workers."

Sometimes the rulers are quite explicit. In 1997, Alan Greenspan extols "heightened job insecurity":

"Atypical restraint on compensation increases has been evident for a few years now and appears to be mainly the consequence of greater worker insecurity. -- Alan Greenspan

So we get right wing political conclusions taught with obsolete theory, as if this were like accepted science, like physics.