One should understand however that this “modern” view of full employment derives from the same theoretical foundation as that which emphasises that the economy would in a world of freely operating markets converge on a position of full-employment.
What this relatively modern view added was that governments would be ill-advised to seek to reduce unemployment beyond the natural rate for fear of exacerbating inflation.
The idea of a non-accelerating rate of unemployment towards which unfettered markets would steer the economy, has informed most discussion about what defines full employment and resulting macro policy for over four decades.
In essence, the hegemony of this view in academic and policy circles manifests itself in the primacy of inflation as a target of central banks – and forms part of the centerpiece which is seen to justify the problematic idea of an independent central bank.
However, the 20th century is rich with an undercurrent of dissent from this view about unemployment the supposedly self-correcting virtues of market economies.
Rather than starting from the standard economic perspective of seeking to explain why there is unemployment, it begins with the following question: why should one expect market economies left to themselves to generate full employment?
The most famous dissenter in this regard was Keynes, but plenty of others have followed, all with the same message: conventional economics has failed to produce a coherent basis for the belief in a spontaneous market mechanism pushing a capital economy towards full employment.
These critcs maintain that those arguments which have been forthcoming from orthodox economics throughout the 20th century are questionable on both theoretical and empirical levels.
In this view, orthodoxy has failed to appreciate particularly how fragile and ultimately incoherent is the theoretical foundation on which conventional arguments about the self -correcting nature of unemployment have been erected.
A corollary of this type of criticism is that government can influence in a positive way and permanent way through its monetary and fiscal policies the long-run growth path of the economy and its proximity to full-employment.
Proximity to some sort of inflation barrier – as if the consequences of inflation were comparable to the social consequences of unemployment – is not an excuse for a macro-policy retreat. Rather it’s a call for greater imagination in policy; God forbid that someone might call out for an incomes policy!
There is nothing natural in the sense of inevitable about full employment in competitive market economies; nor is unemployment something impervious to a coherent macroeconomic policy.
Graham White is the Associate Professor, School of Economics at the University of Sydney. This article was originally published at The Conversation. Read the original article.
