Sven R Larson - Uncertainty, Macroeconomic Stability and the Welfare State

SVEN R. LARSON
Roskilde University, Denmark

First published 2002 by Ashgate Publishing

Reissued 2018 by Routledge
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Copyright Sven R. Larson 2002

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A Library of Congress record exists under LC control number: 2001053601

ISBN 13: 978-1-138-72494-5 (hbk)
ISBN 13: 978-1-315-19212-3 (ebk)

This is a book about macroeconomic stability about the stability of consumption, employment and aggregate income. It is a book about the mechanisms that fundamentally keep our macroeconomy afloat, and about our role as economic agents in these mechanisms. I was originally inspired to write this book (a first version of which was defended as a doctoral dissertation in economics) by the severe swings in employment, consumption and public spending that took place in Sweden in the first years of the 1990s. During a period of only 18 months unemployment in Sweden climbed from virtually full employment to 12%, a change in conditions on the labor market that are if not unique, so at least strikingly unusual in an industrialized country. A sharp fall in private consumption and aggregate demand during the same period, as well as negative GDP growth, added to a situation that definitely was one of macroeconomic instability.

During the first year-and-a-half of this period of instability, 1% of the work force was laid off every 50 days. It is obvious that this brings about great concern among workers in virtually all industries that they might be next in the lay off line. When workers fear losing their jobs, and when they know heir job will cost them some of their income they cannot be as certain as before that they will be able to cover their daily expenses. They become more uncertain about their own economic future, and when they become more uncertain they act so as to preserve as much of their own economic future as possible. This means, in short, that they try to build cash buffers that will help them meet unexpected future expenses. As a result the macroeconomy is destabilized further, and the process of instability threatens to perpetuate itself.

A phenomenon like macroeconomic instability needs a stringent theoretical discussion. But at the same time such explorations of high theory mean little to the practice of economics if its implications are not brought in touch with the real world. Theory, whether within economics or other social sciences, can only be meaningful if ultimately applicable to the real world, to societies where we live our daily lives. Theoretical reasoning, no matter how sophisticated, is void of meaning in the profound every day sense of the word if it does not inspire people outside the domains of academia into understanding and hopefully changing their own conditions of living. Despite this books origin as a doctoral dissertation in economics I hope it can reach beyond dry academic language and allow the aforementioned theoretical explorations to also make sense on a more general plane outside academia. The book does indeed contain an originality in formally bringing together uncertainty, macroeconomic stability and welfare institutions, and this contribution must not be obscured by redundantly academic language. I have therefore revised the text of my doctoral dissertation from which this book springs and it is my hope that the revisions will make the product appealing to readers whose daily life is outside academic institutions.

As is always the case with products of this magnitude, the author is indebted to a number of people. This case is no exception. I would like to thank a number of people for their contributions to the completion of this book. First of all, I want to acknowledge those who supported me in my struggle to complete my doctoral dissertation. Jesper Jespersen, my instructor, was and still is a great source of inspiration, open-minded and curious. Indispensable support also came from Roy J Rotheim, who patiently listened even to my wildest ideas and associations. Over a pizza, muslinger or just a cup of tea he helped me collect all my ideas, gave me critique, recommendations, always refreshingly straight-forward, and directed me towards ever higher levels of insight.

Another important critic whose comments were important and valuable was Frederic S Lee, who advised me on several issues as I worked through the completing stages of my dissertation. I also want to thank my family, whose support on many levels encouraged me during the years of my graduate studies as I commuted long-distance between Sweden and Denmark.

Three people who meant a lot to me in the early stages of my work are Truman F Bewley, Paul M Davidson and Sheila C Dow. I visited them on different occasions, and they took a day or more off to discuss economics with me, a complete stranger from Scandinavia. I learned very much from these meetings and I greatly appreciate Trumans, Pauls and Sheilas hospitality and willingness to share their genuine wisdom with me. I especially wish to thank Truman for sending me a copy of his latest book while it was still a manuscript. I am also indebted to Carl M Campbell III, and Julie Guillette, Nancy P Marion and Karen Pelletier at the Department of Economics, Dartmouth College, for their generous help with the empirical study presented in .

As to the completion of the book manuscript, I first of all want to thank Steven Pressman of Monmouth College, New Jersey. Ronny Norn of Mid Sweden University also provided illuminating and thoughtful comments.

Last but not least, I want to thank Per G Berglund for relentlessly proving that Keynesianism is not just an economic paradigm, but an entire lifestyle.

Both Keynes himself (Keynes 1973a, 1973b, 1991) and more recent contributions by Post Keynesians (Chick 1995; Davidson 1994; Rotheim 1988, 1993) have stressed the close relationship between the stability of the economic system and the success of individuals as economic agents in a world of uncertainty. These contributions eloquently show how uncertainty management is crucial to any treatment of macroeconomic stability within Post Keynesian theory, and they also point out that the route from uncertainty management to macroeconomic stability inevitably passes through the territory of price theory. In other words: the mode of pricing exercises crucial influence upon the stability of the macroeconomy.