Keynesian Policies for Voluntary Unemployment

Abstract

This paper represents an attempt to construct a simple classical model of the aggregate labour market from which it is nevertheless possible to draw certain Keynesian conclusions about the desirability of intervention, in the form of a conventional counter-cyclical fiscal policy, in order to maintain full employment. The starting point of the paper is the observation, based on recent studies of the simulation properties of two macroeconomic models of the United Kingdom, (Brooks et al [1983], Peterson [1984]), that it appears to be possible to devise policies which start from current levels of output, employment and inflation and which represent an unambiguous improvement in all welfare indicators. Such policies have become known as «free lunches», apparently after the habit of 19th century American barkeepers in providing their customers with free, but thirst provoking, food in order to stimulate sales of drink : similar incentives are offered by Nevada casino proprietors. In these contexts the catch is obvious, but in the case of expansionary macroeconomic policies there is scope for more controversy.