3 - The neoclassical analysis of unemployment

Summary

Introduction

Consider the two contrasting perspectives of the normal functioning of an advanced capitalist economy. The mainstream or neoclassical paradigm derives from a belief that the private sector of a capitalist economy is basically self-regulating in some undefined long run; our view is that capitalism is subject to economic and political conflict and to structural change that leads to periodic episodes of poor performance. Throughout the book we shall emphasize two connections: one between the mainstream conception of capitalism as a self-regulating system and its formalization in neoclassical equilibrium analysis and the other between the view of capitalism as a non-self-regulating system and the evolutionary-Keynesian framework developed in these pages. Which of these two analytical frameworks is better suited for modelling historical processes, in particular the unemployment record, can be determined only by a study of the historical record.

In neoclassical equilibrium analysis, long-run outcomes are modelled as interactions between endogenous variables constrained by a set of exogenous variables, usually tastes and technologies. The set of exogenous elements is customarily referred to as the ‘supply side’ or the ‘structural framework’ of the model. When neoclassical equilibrium analysis is used as a descriptive device for modelling capitalism's alleged self-regulating properties, it is assumed that there is a unique long-run equilibrium which depends only upon the values of the exogenous supply-side variables. Because of its properties, the equilibrium functions as an ‘attractor’, ensuring that in the absence of shocks a system in equilibrium will remain there.