Lord Keynes refutes “Lord Keynes”

In discussing neoclassical law of demand, “Lord Keynes” reaches some conclusions to try to attack the notion that enforced minimum wage can cause unemployment in exactly the same way that setting a price above what market participants would have established would cause a surplus. Let's see what he said:

"It is clear that the “law” is expressed in terms that are highly artificial and abstract. The phrase ceteris paribus is Latin for “[all] other things being equal.” The factors that must be held constant are vast: incomes, prices of other goods, fashions, expectations, information, preferences/tastes, population, the weather, etc.

So when somebody asserts that the law of demand is universally true, what this means is that, in an imaginary, utterly abstract and artificial world in which “all other things were equal,” demand for a product would always rise as its price falls, and demand would always fall as the price rises.

Yet these types of arguments are absurd beyond words, because

(1) the real world never fulfils the ceteris paribus assumption and hence the law of demand, properly formulated, is irrelevant, and
(2) economies are immensely complex and the level of employment is dependent on many factors well beyond the simple dynamics of supply and demand curves. The demand for labour is dependent, above all, on aggregate demand for products, and this, along with many other factors, would compensate for and overwhelm any reduction in demand from higher wages, even assuming the abstract formulation of the law is true.

It does not follow that minimum wage laws can only ever necessarily increase unemployment at all."

One comment about (1): As far as I know, no one has ever said that “ceteris paribus” is a condition that could exist in real world. Nobody, not even neoclassicals, is so idiot to think that we can freeze subjective valuations, technologies, incomes, prices, expectations, etc. of the 1300 million people of China to see how price of oil behaves.

Notice that “Lord Keynes” has said that the law of demand is irrelevant in real world, only to talk about his own "law" (point (2))!!! But is his “law” based on real world non-ceteris paribus assumptions? The answer is no, according to the real Lord Keynes:

“[I]t may be useful to make clear which elements in the economic system we usually take as GIVEN, which are the independent variables of our system and which are the dependent variables… We take as GIVEN the existing skill and quantity of available labour, the existing quality and quantity of available equipment, the existing technique, the degree of competition, the tastes and habits of the consumer, the disutility of different intensifies of labour and of the activities of supervision and organisation, as well as the social structure including the forces, other than our variables set forth below, which determine the distribution of the national income. This does not mean that we assume these factors to be constant; but merely that, in this place and context, we are not considering or taking into account the effects and consequences of changes in them.”

“[T]he GIVEN factors allow us to infer what level of national income measured in terms of the wage-unit will correspond to any given level of employment; so that, within the economic framework which we take as given, the national income depends on the volume of employment, i.e. on the quantity of effort currently devoted to production, in the sense that there is a unique correlation between the two. Furthermore, they allow us to infer the shape of the aggregate supply functions, which embody the physical conditions of supply, for different types of products; — that is to say, the quantity of employment which will be devoted to production corresponding to any given level of effective demand measured in terms of wage-units." (italics, bold and capital letters added)

That’s right. Keynes has inferred a kind of “law” by holding everything else constant: “the national income depends on the volume of employment”. Amazingly this ceteris paribus “law” is what "Lord Keynes" invoked as his point (2). But that relation is also subject to the condition that ALL other “factors” are “GIVEN”. We can restate LK assertion by saying that “in an imaginary, utterly abstract and artificial world in which all other things were equal, the level of national income will correspond to any given level of employment (his point (2)). And yet these types of arguments are absurd beyond words, because (1) and (2)”. Even Keynes knew very well that the ceteris paribus couldn’t be fulfilled in real world, but that was not a problem for him to assume all other things as “given” in “the place and context” of what he was analyzing.

His own position puts “Lord Keynes” closest to Hazlitt than to Keynes himself. So I don’t think "Lord Keynes" can sleep tonight… Hazlitt said:

“Keynes thinks "it may be useful to make clear which elements in the economic system we usually take as given, which are the independent variables of our system and which are the dependent variables"… Now economics is concerned with human valuations, human decisions, and human action. Everything in the system is a variable. No relationship (unless it is merely two ways of saying the same thing) is a constant. Nothing is permanently "given." Almost anything can be an "independent" variable, in the sense that a change can originate at that point. When a change has originated at any point, then the relationship of nearly all the factors is one of mutual dependence, of interdependence.”

See also some good remarks about "abstractions" and all that from Jonathan Catalán. Also it’s good to see this Daniel Kuehn’s post. Kuehn is a Keynesian, an “open minded” Keynesian, so even when I don’t agree with the whole post (I think that ABCT explains present US and world crisis fantastically well) he made some very good points.