May We Please Retire George Will and Fred Hiatt?
DeLong: Thinking About Macroeconomic Issues 1925-2006: Economics 202b Lecture (April 7, 2009)

Maynard Keynes Might Say: Real Wages and the Great Depression

From RJW:

Maynard Keynes comments on Ohanian and Cole

in the short period, falling money-wages and rising real wages are each, for independent reasons, likely to accompany decreasing employment; labour being readier to accept wage-cuts when employment is falling off, yet real wages inevitably rising in the same circumstances on account of the increasing marginal return to a given capital equipment when output is diminished."

General Theory Chapter II section 2.

As you know, one didn't have to wait for Blanchard and Kiyotaki or for New Keynesians or--well read Keynes to find the argument that real wages are determined (certainly were determined in the 20s and 30s anyway) by firms when they set prices and must be high when demand is low.

I personally don't share Keynes' certainty that, in the short run, employment is a decreasing function of real wages and vice versa. However, he expressed no doubt whatsoever on the point and managed to explain the Great Depression without appealing to trade unions. I think that if he had known that a reputable professor at UCLA had the idea that the US had extraordinarily huge unemployment in 33 because it had extraordinary strong unions he would have lowered his opinion of Americans (hard as that is to imagine).

There is an argument that the "Red Scare" Palmer raids of the early 1920s plus the fact that nominal wages had just been boosted by wartime inflation made it easy in the early 1920s to shrink nominal spending during the post-WWI deflation without causing a Great Depression--nonfarm unemployment peaked at only 16%. But to me, at least, the spectacle of a market system that is capable of rapid nominal adjustment only under a police state is not to attractive.