Unemployment

I recently read The Puzzle of Modern Economics by Roger E Backhouse. It attempts, quite well I think, to answer the question “Is Economics Science or Ideology?”. It made me realise is that what I know about economics isn’t much. But this is one thing I learnt:

In “Keynesian economics” developed in the middle of the 20th century, unemployment is viewed as involuntary.

…employment was determined by aggregate demand for goods and services. This meant that if aggregate demand were too low, production and income would be low, and unemployment would be high. [Backhouse p118]

A major criticism of Keynesianism, is that it is a purely macroeconomic theory; it considers the economy only at a large scale. There was a desire to make more rigorous economic theories based on microeconomic principals. That is, to explain the behaviour of the economy as a whole based on the aggregate action of individuals. This work began in the late 60’s and has continued to the present day.

One of the first of these theories was “New Classical Economics”. In it unemployment is viewed as voluntary

…unemployment was voluntary – the result of workers choices. In their model, unemployed workers were ‘persons who regard the wage rates at which they could currently be employed as as temporarily low, and who therefore choose to wait or search for improved conditions rather than to invest in moving or changing their occupation.’ [Backhouse p130]

What was surprising to me about both these views of unemployment is not the rightness or wrongness of the statements themselves, but rather that they are both assumptions of their respective models. This means that though both theories can make predictions about unemployment, neither can actually tell you why someone is unemployed – they have both assumed that from the start.