Thursday, March 17, 2011

Reallocating labour - A Thought experiment in economists

Imagine one day economics dies off. We would naturally retrench all the professors of economics. According to their theories, their resources should be better utilized in some other work. The question is what work and how long will it take before they take up other jobs.

The point I am making is that reallocation of labour to other industries and other tasks is not easy. It is a painful process with a lot of stress and agony for the household involved. Economics professors, I am sorry to say, do not understand the problems involved. In a specialized work force these problems compound as set back to income and dignity is enormous. For example, if only jobs available were those of plumbers, and a less qualified economist is a better plumber, it will difficult for the better qualified economist to swallow the reality.

Keynesian approach makes jobs paramount because Keynes understood these problems. While I am not a Keynesian, as goes their definition, I do agree with focus on jobs during times of crisis.

Keynes, some say, likes to maintain status quo while Adam Smith actually hails the reallocation of resources. I believe Keynes and Adam Smith are at different end of the spectrum. If Adam Smith is looking at a car at rest, Keynes is looking at situation where car is speeding out of hand. Keynes' solution on maintaining jobs is akin to ABS braking in cars. In cars, as we know, it is better to have traction and hence brakes are applied and released repeatedly to achieve better braking. If we were to stomp on the brakes we will skid out of control. Similarly, maintain jobs in the times of crisis gives the economy traction to change course and ease into a new reality.

As far as I understand Keynes is a solution for crisis. The mistake Keynesians make is to apply Keynes' theories out of context.