I think the biggest failure of neoclassical economics relates to the way the
labour market operates. so i chose this:
As an aside, the conventional (mainstream) neoclassical economic strategies
relate the cause of unemployment to high real wages that were pushed by trade
unions. The tenet - built upon Say’s Law - states that there are potential
supplies of labour and capital that are capable of generating certain amount of
output that in turn can generate sufficient demand to absorb this output. In
this sense, it argues for cutting down money wages, which will dampen real
wages and this in turn will ‘generate employment’. On the other hand, a more
fruitful analysis challenges this argument and works with the general view that
unemployment is a normal feature of a capitalist economy. In other words,
capitalist economies are characterised by being inherently cyclical, where full
employment and capacity utilization settles at the height of the boom.
The first and foremost basic assumption in here is that both unemployment and
real wages are demand-determined not price-determined. In this sense, real
wages are determined in the product market rather than the labour market. For
further reference, please refer to Sawyer, M. (1985). Whilst money wages are
determined in the labour market, where the trade union activity takes effect,
real wages are relatively little influenced by the conditions in the labour
market and effectively determined by the degree of monopoly. From this
perspective, when money wages are decreased, the general average prices
(specifically the cost-determined prices) will adjust to this decrease in wages
and decrease themselves too, therefore having no final effect on real wages.
Second, the relationship between real wages and the level of output is not
straightforward to predict. When real wages decline, there is no implication
that low real wages causes high output, rather that
both result from a high level of aggregate demand. In the General Theory,
Keynes wrote as follows: ‘Perhaps it will help to rebut the crude conclusion
that a reduction in money wages will increase employment ‘because it reduces
the cost of production’, if we follow up the course of events on the hypothesis
most favorable to this view, namely at the outset entrepreneurs generally
expect the reduction in money wages to have this effect. …if, then,
entrepreneurs generally act on this expectation, will they in fact succeed in
increasing their profits? …The proceeds realized from the increased output will
disappoint the entrepreneurs and employment will fall back again to its
previous figure, unless the marginal propensity to consume is equal to unity or
the reduction in money-wages has the effect of increasing the schedule of
marginal efficiencies of capital relatively to the rate of interest and hence
the amount of investment. See Keynes 1964
[1936], p. 261.
____________________________________________________________________________________
Take the Internet to Go: Yahoo!Go puts the Internet in your pocket: mail, news,
photos & more.
http://mobile.yahoo.com/go?refer=1GNXIC
