Wednesday, April 27, 2011

Full Employment Equilibrium is Not an Austrian Concept

I am repeatedly badgered with the accusation that I don’t understand basic Austrian concepts.

It is somewhat astonishing, then, to see one remark on a recent post showing strange ignorance of basic Austrian theory, in the comment here:
“Free market systems ALWAYs converge to full employment/high employment ‘equilibrium’. Keynesians and statist wars, government spending and funny money dilution impair that process and make adjustments to it painful.”
The trouble is that full employment/high employment “equilibrium” is a neoclassical, not an Austrian, concept.

Austrian economics, as far as I understand it, does not use the neoclassical concept of full employment “equilibrium.”

Instead, some Austrians invoke the concept of pattern/plan co-ordination (e.g., Hayek, Rizzo and O’Driscoll), while others would agree with me (e.g., Lachmann and other radical subjectivists) that there is no tendency to pattern/plan co-ordination or full employment “equilibrium” in a free market economy.

Because of uncertainty, subjective expectations, money as a store of value, financial asset markets, debt deflation, etc., Say’s law does not work, as I have shown here:
“The Myth of Say’s Law,” October 7, 2010.

“F. H. Hahn in a Candid Moment on Neo-Walrasian Equilibrium,” January 29, 2011.
I would also recommend the classic essay by Ludwig Lachmann called “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society.” A sample:
“In a kaleidic society the equilibrating forces, operating slowly, especially where much of the capital equipment is durable and specific, are always overtaken by unexpected change before they have done their work, and the results of their operation disrupted before they can bear fruit. Restless asset markets, redistributing wealth every day by engendering capital gains and losses, are just one instance, though in a market economy an important one, of the forces of change thwarting the equilibrating forces. Equilibrium of the economic system as a whole will thus never be reached. Marshallian markets for individual goods may for a time find their respective equilibria. The economic system never does. What emerges from our reflections is an image of the market as a particular kind of process, a continuous process without beginning or end, propelled by the interaction between the forces of equilibrium and the forces of change. General equilibrium theory only knows interaction between the former.”
(L. M. Lachmann, 1976. “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,” Journal of Economic Literature 14.1: pp. 60–1).
What Lachmann says here is much the same as what Keynes and Post Keynesians would say. The “plan coordination” imagined by Hayek and other Austrians will not occur under these conditions of uncertainty, subjective expectations, and money with a store of value function.

But Keynesians would draw a different conclusion from Lachmann: with no full employment equilibrium and optimum use of resources, there is a space for government intervention on both moral and economic grounds.


Lachmann, L. M. 1976. “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,” Journal of Economic Literature 14.1: 54–62.


  1. LK, easy:

    Indeed, it is popularly used to mean "meet", but as you can see only 1b reflects that, while 1a, 2 and 3 reflect the exact Austrian meaning of "tend" or "approach" rather than "meet".

  2. In term of pure theory, "full employement" is an abstract concept like "the natural rate of interest".

    There is no involuntary unemployement in the unhampered market, just frictional and nothing else. Just institutions (minimun wage, labor laws, long term contracts, barriers to migration, etc.) can create it. This is the "hard core" Austrian position. You also don't find the term full employement because it is assumed when an author refers to a model like stationary state or the ERE (it is implicit). Hayek in P&P assumes full employement, but not in Profits, Interest and Investment. He also wrote a paper "Full employement at any cost?". The statement that Austrians doesn't use the notion of full employement should be, at least, very much relaxed. Broadly speaking: Austrian economics is not a macroeconomics of labour. Labour is no more no less than a factor of production and is treated as such.

    Lachmann represents just one side of Austrian Economics, the most radical and subjectivist one. He also avocated the use of hermeneutic in economics. His positions, surely influential, are everything but unanimous inside the Austrian School of Economics.

    Government and Central Bank are (see Koppl) "Big Players", i.e. privileged actors who distrups markets. They have power and they use it, they divert a portion of entrepreneurial attention away from more narrowly economic data onto aspect of the environment that are subject to unpredictable change: they divert attention from other factos, the fundamentals. Invasive political actions made expectations more vulnerable: partecipants should use ideal type of low anonymity; they create situation of open reflexivity wich frustrate coordination. Profit and loss are less reliable under the effect of intervention.
    This is the point of view of Koppl and of all the guys who study the "Coordination Problem".

    Don't mix disequilibrium with a chronic derangement ("squilibrium"). They're different.

  3. Did anyone notice my use of parentheses around the word "equilibrium".

  4. I guess I've displayed my senility. Did anyone bother to notice that I placed the word "equilibrium" in quotes? As in “so-called equilibrium”.

  5. Your comment:

    "Free market systems ALWAYs converge to full employment/high employment ‘equilibrium’."

    So your single quotations marks mean?

  6. Abba Lerner, who studied under Hayek and was very classical/Austrian for a time, would agree that there will be convergence to full employment in a modern economy. After years, maybe decades of hyperdeflation that would cause a revolution first. He often said things like the Austrian, austerity solution was best. Only problem is that it would take forever and so is impossible. The functional finance solution is a half-way decent approximation.

    Kind of like some branches of mathematics, pure or applied, (e.g. number theory or classical mechanics) where asymptotic, divergent series are actually more useful for numerical calculation and sometimes even theoretical estimates than provably, but very slowly convergent series.

    There is no involuntary unemployment in the unhampered market.As long as there is money, there is involuntary unemployment. The more monetary an economy is, the more prone to unemployment. The Austrian / mainstream theory of money as a commodity is completely unhistoric and wrong, and the main source of their errors.

  7. Nationwide minimum wage law is the most important factor that causes unemployment in developed economies, unemployment incentives (benefits) being close second. Basically government tells people they are forbidden to work legally _and_ makes it more profitable to remain unemployed.

    It would be (and often is) exactly same with any other good. If you make it illegal to sell some good below certain price _and_ subsidize sellers who refrain from selling (actually quite common eg in overregulated agriculture), then how can you expect the market to clear out?

    I am aware of many cases of years of hyperinflation in severly government-hampered markets, but years of hyperdeflation? Who has ever heard of such? And why hyperdeflation at all, it's not like government literally burns money? Calgacus, if there is anthing "unhistoric", it's you. Worker services market definitely clears in less time than durable goods market. After all, workers need to earn their living often on a daily basis.

  8. Minimum wage laws did not exist in the 19th century, yet involuntary unemployment still existed.

  9. hyperdeflation? Who has ever heard of such? Exactly. That's Lerner's point. You get full employment in modern economies that use Austrian policies only after hyperdeflation. You would have a revolution first.

    Believing that involuntary unemployment does not, cannot exist is as scientific and reasonable as believing in elves and fairies. It's not worth arguing about. If your theory does not allow it, so much for the theory. It's not a theory of human economics, but maybe of elf economics.

    As I said, the crucial, false assumption in Austrian theory is its theory of money. It thinks of money as a commodity. This is a widespread and old theory, but has much less scientific value than Aristotle's impetus theory, Ptolemaic astronomy, or even the 4 humours, not to speak of the basically correct theories of phlogiston and the luminiferous aether. :) So called commodity money - a thing that derived its monetary value from its use as a commodity - is simply something that never existed anywhere.

  10. You would have a revolution first.

    So basically in your imaginary world there are revolutions caused by hyperdeflations that never happen because there are revolutions which prevent hyperdeflations from happening in the first place? Cool. Can you also do circular reasoning fallacies while standing up?

    It's not worth arguing about.

    However you evidently do argue about it, a logical absurdity, so conclusion seems to be that it is worth arguing about after all.

    elf economics

    That's supposed to be name calling, but actually, if elfs were conscious beings trying to achieve their goals, and lived in a world of scarcity (ie _not_ in a fairy tale), then praxeology would apply to elfs in equal measure. Unfortunatelly, elfs live in a fairy tale, likely just a couple of blocks from your own neighbourhood.

    It thinks of money as a commodity

    If money is not a commodity, then how can it _not_ be some sort of luminiferous aether?

  11. Joanna, be careful.

    I am inclined to agree with anybody that labour market interventions may have unintended consequences that are far worse.

    But minimum wage doesn't cause "unemployment" so much as "labour surplus".

    Meaning that more people apply for jobs than the number of vacancies available, at current wage rates.

    Why is this not the same as unemployment?

    Imagine two people who are not working. One is only willing to work for $13/hr and the other for $14/hr. Minimum wage is raised from $12/hr to $13/hr.

    The first man goes to stand in line outside factories, but others have already beaten him to it. The second man doesn't even bother standing in line.

    Are we going to say that the first man is unemployed, but the second man is not? Or that the first man was not unemployed, before he went to stand in line?

  12. Prateek, the first man is _involuntarily_ unemployed. He wants to work at the minimum wage, but the $13 minimum wage is set above the clearing market price and there is not enough job offers for him. The second man is _voluntarily_ unemployed. As you say, he does not even bother sending his cv as he knows his services are not as valuable as he would be willing to sell them for. He prefers leisure to $13. And yes, if you set the minimum wage at $14, the second man turns to being _involuntarily_ unemployed if there is not enough job offers for him.

  13. If you don't want to work for the current wage rate you're not unemployed. You chose leisure. If someone is prevented by law to offer a job or you can't underbid the prevailing rate, then there is an institutional barrier.
    Surely market doesn't clear like in textbooks: after a boom - bust cycle uncertainity is bigger than ever and all the economic players that could enjoy inframarginal prices will not change idea just for the fun of it. No one desire a worst salary spontaneously, no one refuse the enforcement of a long term contract just because now prices appear to be a bad deal for the counterpart and so on. If you are in a position to extract a quasi-rent because of law, contracts, customs, interventions or whatever you have an incentive to continue in everyday routine as long you can. Big adjustments are always painful and usually politicians made things worse. Entrepreneurship is never a product of a burocracy.

    @Lord Keynes
    You can find as many data you want about long term unemployment in Europe or Sweden in the last 50 years despite all the kind of intervention you may like. So it proves nothing unemployment during 1890-1900 in U.S. (cynically I may also argue that a deflationary policy didn't "crashed" the economy and at the end U.S. became the 1st economic superpower); if you want very long zero unemployement series you may look former communist countries. But I doubt people desire such kind of regime.

  14. Silvano Fait,

    Full employment = high employemnt economy.
    It does not zero unemployment.

    This perfectly compatible with a certain level of seasononal or frictional unemployment etc

  15. There's not much to quarrel about. Even if we assume "full employment" (meaning 0% unemployment of non-involuntary employment, just the same for this example) in the large, that's not a reason to assume "full employment" in the short run. And the short run may last forever (consider short run as the continuous market process. If you're an Austrian, maybe you would want to call it "process towards the ERE" or something similar). And it probably will!

    Calgacus, you said:

    "So called commodity money - a thing that derived its monetary value from its use as a commodity - is simply something that never existed anywhere."

    Any reference for that? Last time I checked, every money ever existed was the natural evolution of the barter economy.