Industrial unionism

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https://en.wikipedia.org/wiki/Industrial_unionism 

 

Diagram published by the Industrial Workers of Great Britain explaining industrial unionism in terms of two opposing battle fronts

Industrial unionism is a labour union organizing method through which all workers in the same industry are organized into the same union—regardless of skill or trade—thus giving workers in one industry, or in all industries, more leverage in bargaining and in strike situations. Advocates of industrial unionism value its contributions to building unity and solidarity, many suggesting the slogans, "an injury to one is an injury to all" and "the longer the picket line, the shorter the strike." 

Industrial unionism contrasts with craft unionism, which organizes workers along lines of their specific trades, i.e., workers using the same kind of tools, or doing the same kind of work with approximately the same level of skill, even if this leads to multiple union locals (with different contracts, and different expiration dates) in the same workplace.

Perceived disadvantages of craft unionism

In 1922, Marion Dutton Savage cataloged the disadvantages of craft unionism, as observed by industrial union advocates. These included "distressingly frequent disputes between different craft unions" over jurisdiction; modern industry results in a constant process of phasing out old skills; one trade doing the struck work of another entity is a frequent dilemma; expiration of contracts can be staggered, hindering coordination of strikes. Industrial unionists observe that craft union members are more often required by their contracts to cross the picket lines established by workers in other unions. Likewise, in a strike of (for example) coal miners, unionized railroad workers may be required by their contracts to haul "scab" coal. 

Employers find it easier to enforce one bad contract, then use that as a precedent. Employers could also show favoritism to a strategic group of workers. Employers also find it easier to outsource the struck work of a craft union.

A craft union with critical skills may be able to shut down an entire industry. The disadvantage is the harsh feelings of those who may be forced out of work by such an action, yet receive none of the bargained-for benefits.

Arguments for industrial unionism

Savage observed that industrial unionists criticized craft unionism not only for the ineffectiveness in dealing with a single employer, but also against larger corporate conglomerates. A union that challenges such a combination is most effective if its own structure reflects that of the company. Industrial unions likewise do not normally assess prohibitive dues rates common with craft unions, which serve to keep out many workers. Thus, the entire group of workers finds solidarity more elusive.

Spirit and philosophy of industrial unionism

A cartoon from the September, 1919 IWW periodical One Big Union, published in Revolutionary Radicalism (a government publication), shows a worker swimming through shark-infested waters. The shark is labeled capitalism, the boat is industrial unionism, the life buoy is IWW, and the harpoon is direct action.

The concept of industrial unionism is important, not only to organized workers but also to the general public, because the philosophy and spirit of this organizing principle go well beyond the mere structure of a union organization. According to Marian Dutton Savage, who wrote about industrial unionism in America in 1922,

It is this difference in spirit and general outlook which is the significant thing about industrial unionism. Including as it does all types of workers, from the common laborer to the most highly skilled craftsman, the industrial union is based on the conception of the solidarity of labor, or at least of that portion of it which is in one particular industry. Instead of emphasizing the divisions among the workers and fostering a narrow interest in the affairs of the craft regardless of those of the industry as a whole, it lays stress on the mutual dependence of the skilled and the unskilled and the necessity of subordinating the interests of a small group to those of the whole body of workers. Not only is loyalty to fellow-workers in the same industry emphasized, but also loyalty to the whole working class in its struggle against the capitalist system.

Savage noted that some industrial unions of the period had "little of this class consciousness, [however] the majority of them are distinctly hoping for the abolition of the capitalist system and the ultimate control of industry by the workers themselves."

The conception of how this was to be brought about, and indeed even the extent to which such ideas were present in an industrial union, was quite variable from one union to another, as well as from one country to another, and from one time to another.

In the United States, the conception of industrial unionism in the 1920s certainly differed from that of the 1930s, for example. The Congress of Industrial Organizations (CIO) primarily practiced a form of industrial unionism prior to its 1955 merger with the American Federation of Labor (AFL), which was mostly craft unions. Unions in the resulting federation, the AFL-CIO, sometimes have a mixture of tendencies.

The most basic philosophy of the union movement observes that an individual cannot stand alone against the power of the company, for the employment contract confers advantage to the employer. Having come to that understanding, the next question becomes: who is to be included in the union?

• The craft unionist advocates sorting workers into exclusive groups of skilled workers, or workers sharing a particular trade. The organization operates, and the rules are formulated primarily to benefit members of that particular group.
• Savage identified a skilled group that may not be craft based, but is nonetheless an elite group among industrial unionists. They are in essence craft groups which have been combined to solve "jurisdictional difficulties". Savage called this group an industrial union tendency rather than an example, made up of the "upper stratum of skilled trades," and describes them as retaining some autonomy within their particular trades.
• The industrial unionist sees advantage in organizing by industry. The local organization is broader and deeper, with less opportunity for employers to turn one group of workers against another. These are the "middle stratum" of workers.
• Industrial unionists motivated by a more global impulse act upon a universal premise, that all workers must support each other no matter their particular industry or locale. These might be unskilled or migratory workers who conceive of their union philosophy as one big union. In 1922 these workers were described as "believing in assault rather than in agreements with employers, and having little faith in political action. [The one big union's] power is spectacular rather than continuous, as its members have little experience in organization."

The differences illustrated by these diverse approaches to organizing touch upon a number of philosophical issues:

• Should all working people be free—and perhaps even obliged—to support each other's struggles?
• What is the purpose of the union itself—is it to get a better deal for a small group of workers today, or to fight for a better environment for all working people in the future? (Or both... ? )

But some philosophical issues transcend the current social order:

• Should the union acknowledge that capital has priority—that is, that employers should be allowed to make all essential decisions about running the business, limiting the union to bargaining over wages, hours, and conditions? Or should the union fight for the principle that working people create wealth, and are therefore entitled to access to that wealth?
• What is the impact of legislation designed specifically to curtail union tactics? Considering that unions have sometimes won rights by defying unjust laws, what should be the attitude of unionists toward that legislation? And finally, how does the interaction between aggressive unionization, and government response, play out?

In short, these are questions of whether workers should organize as a craft, by their industry, or as a class. 

The implications of these last conjectures are considerable. When a group of workers becomes conscious of some connection to all other workers, such realization may animate a desire not just for better wages, hours, and working conditions, but rather, to change the system that limits or withholds such benefits. Paul Frederick Brissenden acknowledged as much in his 1919 publication The I.W.W. A Study of American Syndicalism. Brissenden described revolutionary industrial unionism as industrial unionism "animated and guided by the revolutionary (socialist or anarchist) spirit..." Brissenden wrote that both industrial unionism and revolutionary industrial unionism "hark back in their essential principles to [a] dramatic revolutionary period in English unionism..." of roughly the late 1820s, the 1830s and the 1840s. He traced both the industrial and the revolutionary impulses through various union movements ever since. 

From the Knights of Labor to the Congress of Industrial Organizations (CIO), with all of the industrial unions and federations in between, the nature of union organization has been in contention for a very long time, and the philosophies of industrial unionism are inter-related. The Western Federation of Miners (WFM) was inspired by the industrial unionism example of the American Railway Union (ARU). Labor Historian Melvyn Dubofsky traces the birth of the Industrial Workers of the World (IWW) to the industrial unionism of the Western Federation of Miners, and their years under fire during the Colorado Labor Wars. And James P. Cannon has observed that "the CIO became possible only after and because the IWW had championed and popularized the program of industrial unionism in word and deed." As we shall see below, unionism that dares to be powerful invites burgeoning challenges from other powerful interests.

History of industrial unionism

Organizational philosophies for the labor movement grow out of observation and experimentation. Success and failure combine with the aspirations and needs of working people and, in many cases, with the role of government to determine which union concepts will flourish, and which will be abandoned.

Mass organization displaced

Terence Powderly, Grand Master Workman of the Knights of Labor

 

The Knights of Labor (KOL) was a mass organization, embracing nearly any worker who wanted to join. An early advocate of producerism, the KOL was so loosely organized that it admitted physicians and employers.

The evolution and competition of labor organizations is quite complex, and there are many factors beyond philosophy or specific organizational structure that determine success or failure. The KOL's policies on a number of issues seemed more progressive than those of the AFL—organizing unskilled workers, educating against discrimination, and a dedication to broad idealism. The KOL subordinated separate craft interests to the welfare of all the workers.

The KOL had an enormous membership compared to the early AFL. The KOL primarily consisted of previously unorganized semi-skilled workmen and machine operators. During 1886 KOL membership grew from 15,000 members to 700,000.

But the AFL seemed more in touch with some of the goals of working people. The KOL began to falter when its leadership appeared to be out of touch with those goals. For example, the AFL supported the eight-hour day. Although the Knights supported the concept in their constitution, they failed to provide a plan for its implementation. Perhaps in part because employers were accepted into the KOL, leadership of the Knights considered a shorter workday impractical. The KOL leadership tried fruitlessly to discourage members from supporting the eight-hour movement that was embraced by the AFL. In its declining years, the remaining KOL membership was primarily rural and middle class.

Ascendance of a craft union federation

The American Federation of Labor (AFL) under the leadership of Samuel Gompers focused on "pure and simple" trade unionism. The AFL concerned itself with a "philosophy of pure wage consciousness", according to Selig Perlman, who developed the "business unionism" theory of labor. Perlman saw craft organizing as a means of resisting the encroachment of waves of immigrants. Organization that was based upon craft skills granted control over access to the job. In a sense, craft unions provided a good defense for the privileges of membership, but the offensive power of craft unions to effect change in society at large has been circumscribed by a self-limiting vision. The AFL was businesslike and pragmatic, adopting the motto, "A fair day's wage for a fair day's work."

The early rationale for craft unionism was that solidarity among diverse workers seemed difficult to obtain, while the AFL believed that skilled workers could more easily get improved conditions for themselves. Thus, craft unions have been criticized as a labor elite.

Many Black workers never had the opportunity to learn a skill, and most AFL unions did not organize unskilled workers. Not only did many AFL unions exclude Black workers or relegate them into separate organizations, different groups of Asian immigrants had been excluded for decades. In May 1905 the Asiatic Exclusion League was organized to propagandize against Asian immigration, with many unions participating.

Samuel Gompers, head of the American Federation of Labor

The AFL frequently enforced its agenda upon its member unions with an imposed exclusivity. For example, the United Brewery Workmen (UBW) was affiliated with both the AFL and the Knights of Labor (KOL) from 1893 to 1896. Their purpose in dual affiliation was increasing the breadth of the boycott, which they had found a useful weapon. The AFL threatened to revoke the charter of the national UBW, and they withdrew from the KOL, while urging their individual members to keep their membership in the KOL.

When possible, the AFL forced industrial unions to break up into craft unions, dividing their memberships into exclusive groups with individual contracts. One example was the Amalgamated Association of Street Car Employees (AASCE) in 1912 which, with the aid of Cyrus S. Ching as company negotiator for Boston's public transit system, reached a system-wide agreement for all transit workers. But the AFL and its building trades affiliates were not happy with such an arrangement. Ching, AFL President Samuel Gompers, and International President William D. Mahon of the AASCE, held conferences in which the AASCE ceded jurisdiction over carpenters, painters, electricians, and other skilled trades. The union's membership was divided into 34 distinct labor units, each with a separate agreement.

Having experienced such a breakout into separate labor classifications at Boston transit, Ching opposed such a concept when he became director of industrial relations for the United States Rubber Company. According to economic analyst A. H. Raskin, Ching recognized "that the AFL's commitment to craft delimitation provided poor protection for the welfare of workers in a mass production industry like rubbermaking, which operated along industrial, rather than craft, lines."

Before Herbert Hoover became president, he befriended AFL President Gompers. Hoover, as the former United States Food Administrator, president of the Federated Engineering Societies, and then Secretary of Commerce in the Harding Cabinet in 1921, invited the heads of several "forward-looking" major corporations to meet with him.

[Hoover] asked these men why their companies didn't sit down with Gompers and try to work out an amicable relationship with organized labor. Such a relationship, in Hoover's opinion, would be a bulwark against the spread of radicalism reflected in the rise of the "Wobblies," the Industrial Workers of the World. The Hoover initiative got no encouragement from those at the meeting. The obstacles that Hoover did not comprehend, [Cyrus] Ching recorded in his memoir, were that Gompers had no standing in the affairs of any company except to the extent that AFL unions had organized the workers, and that the federation's focus on craft unionism precluded any effective organization of the mass-production industries by [the AFL's] affiliates.

Industrial unionism as rejection of craft unionism

Cartoon spoof of craft union divisions in the AFL from a Wobbly perspective

Six weeks after formation of the Asiatic Exclusion League, the Industrial Workers of the World was formed in Chicago, created as a rejection of the narrow craft unionism philosophy of the AFL. From its inception, the IWW would organize without regard to sex, skills, race, creed, or national origin.

An outgrowth of the struggles of the Western Federation of Miners (WFM), the IWW also adopted the WFM's description of the AFL as the "American Separation of Labor". While the IWW shared the concept of a mass-oriented labor movement—what the IWW would call One Big Union—with the Knights of Labor, the idea of workers having much in common with employers was discarded by the IWW, whose Preamble declares that "the working class and the employing class have nothing in common."

According to Eugene V. Debs, "seasoned old unionists" recognized in 1905 that working people could not win with the labor movement they had. Among the critiques of the AFL were organized scabbery of one union on another, jurisdictional squabbling, an autocratic leadership, and a relationship between union leaders and millionaires in the National Civic Federation that was altogether too cozy. IWW leaders believed that in the AFL there was too little solidarity, and too little "straight" labor education. These circumstances led to too little appreciation of what could be won, and too little will to win it.

For many, organizing industrially is seen as conferring a more powerful structural base from which to challenge employers. Yet this very power has sometimes prompted governments to act as a counterweight to maintain the existing power relationships in society. There are historical examples.

Eugene Debs formed the American Railway Union (ARU) as an industrial organization in response to craft limitations. Railroad engineers and firemen had called a strike, but other employees, particularly conductors who were organized into a different craft, did not join that strike. The conductors piloted scab engineers on the train routes, helping their employers to break the strike. In June 1894, the newly formed, industrially organized ARU voted to join in solidarity with an ongoing strike against the Pullman company. The sympathy strike demonstrated the enormous power of united action, yet resulted in a decisive government response to end the strike and destroy the union.

Within hours of the ARU lending support to the boycott, Pullman traffic ceased to move from Chicago to the West. The boycott then spread to the South and the East. 

A statement was issued by the chairman of the General Managers Association, a "half-secret combination of twenty-four railroads centering on Chicago," which acknowledged the power of industrial unionism:

We can handle the railway brotherhoods, but we cannot handle the A.R.U.... We cannot handle Debs. We have got to wipe him out.

The General Managers turned to the federal government, which immediately sent federal troops and United States Marshals to force an end to the strike.

Eugene V. Debs

 

Bill Haywood

One union leader who closely observed the experiences of the ARU was Big Bill Haywood, who became the powerful secretary treasurer of the Western Federation of Miners (WFM). Haywood had long been a critic of the craft unionism of the AFL, and applied the industrial unionism critique to the railway brotherhoods — closely associated as they were with the AFL — in a strike called by his own miner's union. 

The WFM had sought to extend the benefits of union to mill workers who processed the ore dug by miners. Miners and mill workers walked out to support the organizing drive. The 1903-04 Cripple Creek strike was defeated when unionized railroad workers continued to haul ore from the mines to the mills, in spite of strike breakers having been introduced at mine and at mill. "The railroaders form the connecting link in the proposition that is scabby at both ends," Haywood wrote. "This fight, which is entering its third year, could have been won in three weeks if it were not for the fact that the trade unions are lending assistance to the mine operators."

A craft unionist might argue the miners would have been better off sticking to their own business. After all, both the miner's union and the fledgling mill worker's unions had been destroyed. But Haywood took away from this experience the conviction that labor needed more, not less, industrial unionism. The miners had struck in sympathy with the smeltermen, but other unions—notably, craft unions—had not.

Haywood went on to help organize the Industrial Workers of the World (IWW), which was itself injured by government action during and after World War I.

In 1912, William E. Bohn was able to predict about the two foremost examples of industrial unionism then extant, "It is possible that neither the Industrial Workers of the World nor the Detroit I. W. W. will ever become numerically important. But the principle of industrial unionism is becoming increasingly a power in the land." While the IWW was debilitated by government repression and a serious 1924 split, and the Detroit IWW simultaneously ceased to exist, the more basic principles of industrial unionism were adopted by the very successful CIO in the 1930s.

Companies prefer to be organized by craft unions

Many companies prefer no union whatsoever. However, when given the choice of an industrial union or a craft union, companies appear to prefer organization by craft unions. As an example, after the American Railway Union was destroyed, Eugene Debs, who had read Marx while serving his sentence, turned to politics, seeking solutions to the problems of working people through socialism. Some railroad workers in Indiana, Kansas, and Illinois who had been a part of Debs' ARU in 1894 resented the fact that Debs turned to socialism for,

...[Debs] had left them without a fighting industrial union and forced them to enter the scab craft movements after he changed the ARU to a political movement...

There was an effort to establish a new industrial union to take the place of the railroad brotherhoods. The United Brotherhood of Railway Employees (UBRE) was formed, with George Estes as president. Estes came from a faction of the Order of Railroad Telegraphers. The UBRE came to public notice when it conducted a moderately successful strike in Manitoba in 1902.

Like the General Managers Association of Chicago, the Southern Pacific Railroad (SPR) acknowledged the danger in allowing railway workers to form an industrial union. The SPR hired the Pinkerton Agency to infiltrate and destroy the UBRE. One of the Pinkerton labor spy tactics was persuading workers to quit the industrial union and instead join a craft union. The defeat of the UBRE ended the last major attempt to organize North American railway workers into an industrial union.

Scranton Declaration and isolation of industrial unions

In 1904 the largest industrial union organization, the Western Federation of Miners, was under significant pressure from employer association attacks and the use of military force in Colorado. The WFM's labor federation, the American Labor Union had not gained significant membership. The AFL was the largest organized labor federation, and the UBRE felt isolated. When they applied to the AFL for a charter, the Scranton Declaration of 1901 was the AFL's guiding principle.

Gompers had promised that each trade and craft would have its own union. The Scranton Declaration acknowledged that one affiliate, the United Mine Workers was formed as an industrial union, but that other skilled trades—carpenters, machinists, etc.—were organized as powerful craft unions. These craft unions refused to allow any encroachment upon their "turf" by the heretical industrial unionists. This concept came to be known as voluntarism. The federation turned the UBRE down in accord with the voluntarism principle. The Scranton Declaration acknowledging voluntarism was adhered to, even though the craft-based railroad brotherhoods had not yet joined the AFL. The AFL was holding the door open for craft unions that might join, and slamming it in the face of the industrial unions who wanted to join. The following year the two thousand member UBRE joined the organizing convention of the IWW.

Craft union federation adopting an industrial union concept

The craft-based AFL had been slow to organize industrial workers, and the federation remained steadfastly committed to craft unionism. This changed in the mid-1930s when, after passage of the National Labor Relations Act, workers began to clamor for union membership. In competition with the CIO movement, the AFL established Federal Labor Unions (FLUs), which were local industrial unions affiliated directly with the AFL, a concept initially envisioned in the 1886 AFL Constitution. FLUs were conceived as temporary unions, many of which were organized on an industrial basis. In keeping with the craft concept, FLUs were designed primarily for organizing purposes, with the membership destined to be distributed among the AFL's craft unions after the majority of workers in an industry were organized.

Radicalism in the union movement

A cartoon from the May, 1919 IWW periodical One Big Union, published in Revolutionary Radicalism, shows a worker (representing the working class) choosing between an AFL slogan (A Fair Day's Pay for a Fair Day's Work) and an IWW slogan (Abolition of the Wage System).

 

Anti-IWW cartoon from The American Employer, published 1913, with the Industrial Workers of the World organizing drive editorialized as "a volcano of hate stirred into active eruption at Akron, by alien hands, which pour into the crater the disturbing acids and alkalis of greed, class hatred and anarchy. From the mouth of the pit rise poisonous clouds of suspicion, malice and envy to pollute the air, while from the cracked and breaking sides of the groaning mountain flow streams of lava of murder, anarchy and destruction, threatening to engulf in their path the fair cities and fertile farms of Ohio."

 

Eugene Debs' early experience with labor actions convinced him to move from craft unionism to militant industrial unionism. During his six months in prison after the American Railway Union was crushed, he became acquainted with socialist principles.

Ed Boyce of the Western Federation of Miners also embraced industrial unionism, believing, as did Debs, that it had more potential than craft unionism. They likewise recognized that industrial unionism alone could not bring into existence the new society that they envisioned. They, along with the WFM's Bill Haywood and others, were instrumental in launching the Western Labor Union, which soon became the American Labor Union, which in 1905 led the way to the Industrial Workers of the World (IWW). Boyce proclaimed that labor must "abolish the wage system which is more destructive of human rights and liberty than any other slave system devised", and the IWW later echoed his words in its Preamble. "The working class and the employing class have nothing in common," the Preamble proclaimed. "There can be no peace so long as hunger and want are found among millions of working people and the few, who make up the employing class, have all the good things of life. Between these two classes a struggle must go on..."

Thus, industrial unionism, guided as it was by socialist promptings, has sometimes been considered a more radical—or even revolutionary—form of unionism (see below.) 

The CIO and to a lesser extent, the AFL (which was already more conservative) purged themselves of radical members and officers in the years before they merged, as part of what came to be known as the (second) red scare. Some entire unions, perceived by the labor federation leadership as incapable of being reformed, were expelled or replaced.

Revolutionary industrial unionism

Tied closely to the concept of organizing not as a craft, or even as a group of workers with industrial ties, but rather, as a class, is the idea that all of the business world and government, and even the preponderance of the powerful industrial governments of the world, tend to unite to preserve the status quo of the economic system. This encompasses not only the various political systems and the vital question of property rights, but also the relationships between working people and their employers.

Such tendencies appeared to be in play in 1917, the year of the Russian Revolution. Fred Thompson has written, "Capitalists believed revolution imminent, feared it, legislated against it and bought books on how to keep workers happy." Such instincts also played a role when the governments of fourteen industrialized nations intervened in the civil war that followed the Russian Revolution. Likewise, when the Industrial Workers of the World became the target of government intervention during the period from 1917 to 1921, the governments of the United States, Australia and Canada acted simultaneously. 

In the United States, IWW executive board officer Frank Little was lynched from a railroad trestle. Seventeen Wobblies in Tulsa were beaten by a mob and driven out of town. In the third quarter of 1917, the New York Times ran sixty articles attacking the IWW. The Justice Department launched raids on IWW headquarters across the country. The New-York Tribune suggested that the IWW was a German front, responsible for acts of sabotage throughout the nation.

Writing in 1919, Paul Brissenden quoted an IWW publication in Sydney, Australia:

All the machinery of the capitalist state has been turned against us. Our hall has been raided periodically as a matter of principle, our literature, our papers, pictures, and press have all been confiscated; our members and speakers have been arrested and charged with almost every crime on the calendar; the authorities are making unscrupulous, bitter and frantic attempts to stifle the propaganda of the I.W.W.

Brissenden also recorded that

...several laws have been enacted which have been more or less directly aimed at the Industrial Workers of the World. Australia led off with the "Unlawful Associations Act" passed by the House of Representatives of the Commonwealth in December, 1916. (Reported in the New York Times, December 20, 1916, p. s, col. 2. Cf. infra, p. 341.) Within three months of the passage of the Australian Act, the American States of Minnesota and Idaho passed laws "defining criminal syndicalism and prohibiting the advocacy thereof." In February, 1918, the Montana legislature met in extraordinary session and enacted a similar statute.

At Sacramento, on January 16, 1919, according to daily press reports, all of the 46 defendants in the California I.W.W. conspiracy case tried there in the Federal District Court were found guilty of conspiring to violate the Constitution of the United States and the Espionage Act and with attempting to obstruct the war activities of the Government. All of the defendants were members—or alleged members—of the I.W.W. and the case is similar to the one tried in Chicago in 1918. On January 17 Judge Rudkin is reported to have sentenced 43 of the defendants to prison terms of from one to ten years (New York Times, January 17 and 18, 1919).

In essence, the lesson learned is that governments will use legislative and judicial means to thwart attempts to change the economic system, even when conducted by non-violent means. Therefore, in order to significantly improve the status of working people who sell their labor—according to this belief—no less than organizing as an entire class of workers can accomplish and sustain the necessary change.

While Brissenden notes that IWW coal miners in Australia successfully used direct action to free imprisoned strike leaders and to win other demands, Wobbly opposition to conscription during World War I "became so obnoxious" to the Australian government that laws were passed which "practically made it a criminal offense to be a member of the I.W.W."

From its first convention in Chicago in 1905, the Industrial Workers of the World (IWW) clearly stated its philosophy and its goals: rather than accommodating capitalism, the IWW sought to overthrow it. The IWW organized more broadly than did the CIO or the Knights of Labor. The IWW sought to unite the entire working class into One Big Union which would struggle for improved working conditions and wages in the short term, while working to ultimately overthrow capitalism through a general strike, after which the members of the union would manage production.

One Big Union

Historically, industrial unionism has frequently been associated with the concept of One Big Union (OBU). On July 12, 1919, The New England Worker published "The Principle of Industrial Union":

The principle on which industrial unionism takes its stand is the recognition of the never ending struggle between the employers of labor and the working class. [The industrial union] must educate its members to a complete understanding of the principles and causes underlying every struggle between the two opposing classes. This self-imposed drill, discipline and training will be the methods of the O. B. U.

In short the Industrial Union, is bent upon forming one grand united working class organization and doing away with all the divisions that weaken the solidarity of the workers to better their conditions.

Revolutionary Industrial Unionism, that is the proposition that all wage workers come together in organization according to industry; the groupings of the workers in each of the big divisions of industry as a whole into local, national, and international industrial unions; all to be interlocked, dovetailed, welded into One Big Union for all wage workers; a big union bent on aggressively forging ahead and compelling shorter hours, more wages and better conditions in and out of the work shop... until the working class is able to take possession and control of the machinery, premises, and materials of production right from the capitalists' hands...

Political parties and industrial unionism

Some political parties also promote industrial unionism, such as the Socialist Labor Party of America, whose early leader Daniel De Leon formulated a form of industrial unionism as the mechanism of government in the SLP's vision of a socialist society, and the British Labour Party which has relations with affiliated trade unions.

Industrial unionism outside the United States

Australia

Verity Burgmann asserts in Revolutionary industrial unionism that the IWW in Australia provided an alternate form of labour organising, to be contrasted with the Laborism of the Australian Labor Party and the Bolshevik Communism of the Communist Party of Australia. Revolutionary industrial unionism, for Burgmann, was much like revolutionary syndicalism, but focused much more strongly on the centralised, industrial, nature of unionism. Burgmann saw Australian syndicalism, particularly anarcho-syndicalism, as focused on mythic small shop organisation. For Burgmann the IWW's vision was always a totalising vision of a revolutionary society: the Industrial Commonwealth.

The IWW's politics in 2007 mirror Burgmann's analysis: the IWW does not proclaim Syndicalism, or Anarchism (despite the large number of anarcho-syndicalist members) but instead advocates Revolutionary Industrial Unionism.

United Kingdom

Marion Dutton Savage associates the spirit of industrial unionism with "the aspiration of workers for the control of industry" inspired by Robert Owen in 1833-34. The Grand National Consolidated Trades Union (GCTU) recruited skilled and unskilled workers from many industries, with membership growing to half a million within a few weeks. Frantic opposition forced the GCTU to collapse after a few months, but the ideals of the movement lingered for a time. After Chartism failed, British unions began to organize only skilled workers, and began to limit their goals in tacit support of the existing organization of industry.

A new union movement that was "distinctly class conscious and vaguely Socialistic" began to organize unskilled workers in 1889.

Industrial unionism thence proceeded primarily by combining craft unions into industrial formations, rather than through the birth of new industrial organizations. Industrial organizations prior to 1922 included the National Transport Workers' Federation, the National Union of Railwaymen, and the Miners' Federation of Great Britain.

In 1910 Tom Mann went to France and became acquainted with syndicalism. He returned to Britain and helped to organize the Workers' International Industrial Union, which was similar to the IWW from North America.

Korea

The theory and practice of industrial unionism is not confined to the western, English speaking world. The Korean Confederation of Trade Unions (KCTU) is committed to reorganizing their current union structure along the lines of industrial unionism.

South Africa

The Congress of South African Trade Unions (COSATU) is also organized along the lines of industrial unionism.

Stagflation

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Stagflation 

 

In economics, stagflation or recession-inflation is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate unemployment.

The term, a portmanteau of stagnation and inflation, is generally attributed to Iain Macleod, a British Conservative Party politician who became Chancellor of the Exchequer in 1970. Macleod used the word in a 1965 speech to Parliament during a period of simultaneously high inflation and unemployment in the United Kingdom. Warning the House of Commons of the gravity of the situation, he said:

We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of "stagflation" situation. And history, in modern terms, is indeed being made.

Macleod used the term again on 7 July 1970, and the media began also to use it, for example in The Economist on 15 August 1970, and Newsweek on 19 March 1973.

John Maynard Keynes did not use the term, but some of his work refers to the conditions that most would recognise as stagflation. In the version of Keynesian macroeconomic theory that was dominant between the end of World War II and the late 1970s, inflation and recession were regarded as mutually exclusive, the relationship between the two being described by the Phillips curve. Stagflation is very costly and difficult to eradicate once it starts, both in social terms and in budget deficits.

The Great Inflation

The term stagflation, a portmanteau of stagnation and inflation, was first coined during a period of inflation and unemployment in the United Kingdom. The United Kingdom experienced an outbreak of inflation in the 1960s and 1970s. Inflation rose in the 1960s and 1970s, UK policy makers failed to recognize the primary role of monetary policy in controlling inflation. Instead, they attempted to use non-monetary policies and devices to respond to the economic crisis. Policy makers also made "inaccurate estimates of the degree of excess demand in the economy, [which] contributed significantly to the outbreak of inflation in the United Kingdom in the 1960s and 1970s.

Stagflation was not limited to the United Kingdom, however. Economists have shown that stagflation was prevalent among seven major market economies from 1973 to 1982. After inflation rates began to fall in 1982, economists' focus shifted from the causes of stagflation to the "determinants of productivity growth and the effects of real wages on the demand for labor".

Causes

Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when the economy faces a supply shock, such as a rapid increase in the price of oil. An unfavorable situation like that tends to raise prices at the same time as it slows economic growth by making production more costly and less profitable.

Second, the government can cause stagflation if it creates policies that harm industry while growing the money supply too quickly. These two things would probably have to occur simultaneously because policies that slow economic growth do not usually cause inflation, and policies that cause inflation do not usually slow economic growth.

Both explanations are offered in analyses of the 1970s stagflation in the West. It began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, causing a price/wage spiral.

Postwar Keynesian and monetarist views

Early Keynesianism and monetarism

Up to the 1960s, many Keynesian economists ignored the possibility of stagflation, because historical experience suggested that high unemployment was typically associated with low inflation, and vice versa (this relationship is called the Phillips curve). The idea was that high demand for goods drives up prices, and also encourages firms to hire more; and likewise high employment raises demand. However, in the 1970s and 1980s, when stagflation occurred, it became obvious that the relationship between inflation and employment levels was not necessarily stable: that is, the Phillips relationship could shift. Macroeconomists became more skeptical of Keynesian theories, and Keynesians themselves reconsidered their ideas in search of an explanation for stagflation.

The explanation for the shift of the Phillips curve was initially provided by the monetarist economist Milton Friedman, and also by Edmund Phelps. Both argued that when workers and firms begin to expect more inflation, the Phillips curve shifts up (meaning that more inflation occurs at any given level of unemployment). In particular, they suggested that if inflation lasted for several years, workers and firms would start to take it into account during wage negotiations, causing workers' wages and firms' costs to rise more quickly, thus further increasing inflation. While this idea was a severe criticism of early Keynesian theories, it was gradually accepted by most Keynesians, and has been incorporated into New Keynesian economic models.

Neo-Keynesianism

Neo-Keynesian theory distinguished two distinct kinds of inflation: demand-pull (caused by shifts of the aggregate demand curve) and cost-push (caused by shifts of the aggregate supply curve). Stagflation, in this view, is caused by cost-push inflation. Cost-push inflation occurs when some force or condition increases the costs of production. This could be caused by government policies (such as taxes) or from purely external factors such as a shortage of natural resources or an act of war.

Contemporary Keynesian analyses argue that stagflation can be understood by distinguishing factors that affect aggregate demand from those that affect aggregate supply. While monetary and fiscal policy can be used to stabilise the economy in the face of aggregate demand fluctuations, they are not very useful in confronting aggregate supply fluctuations. In particular, an adverse shock to aggregate supply, such as an increase in oil prices, can give rise to stagflation.

Supply theory

Fundamentals

Supply theories are based on the neo-Keynesian cost-push model and attribute stagflation to significant disruptions to the supply side of the supply-demand market equation, such as when there is a sudden real or relative scarcity of key commodities, natural resources, or natural capital needed to produce goods and services. Other factors may also cause supply problems, for example, social and political conditions such as policy changes, acts of war, extremely restrictive government control of production. In this view, stagflation is thought to occur when there is an adverse supply shock (for example, a sudden increase in the price of oil or a new tax) that causes a subsequent jump in the "cost" of goods and services (often at the wholesale level). In technical terms, this results in contraction or negative shift in an economy's aggregate supply curve.

In the resource scarcity scenario (Zinam 1982), stagflation results when economic growth is inhibited by a restricted supply of raw materials. That is, when the actual or relative supply of basic materials (fossil fuels (energy), minerals, agricultural land in production, timber, etc.) decreases and/or cannot be increased fast enough in response to rising or continuing demand. The resource shortage may be a real physical shortage, or a relative scarcity due to factors such as taxes or bad monetary policy influencing the "cost" or availability of raw materials. This is consistent with the cost-push inflation factors in neo-Keynesian theory (above). The way this plays out is that after supply shock occurs, the economy first tries to maintain momentum. That is, consumers and businesses begin paying higher prices to maintain their level of demand. The central bank may exacerbate this by increasing the money supply, by lowering interest rates for example, in an effort to combat a recession. The increased money supply props up the demand for goods and services, though demand would normally drop during a recession.

In the Keynesian model, higher prices prompt increases in the supply of goods and services. However, during a supply shock (i.e., scarcity, "bottleneck" in resources, etc.), supplies do not respond as they normally would to these price pressures. So, inflation jumps and output drops, producing stagflation.

Explaining the 1970s stagflation

Following Richard Nixon's imposition of wage and price controls on 15 August 1971, an initial wave of cost-push shocks in commodities were blamed for causing spiraling prices. The second major shock was the 1973 oil crisis, when the Organization of Petroleum Exporting Countries (OPEC) constrained the worldwide supply of oil. Both events, combined with the overall energy shortage that characterized the 1970s, resulted in actual or relative scarcity of raw materials. The price controls resulted in shortages at the point of purchase, causing, for example, queues of consumers at fuelling stations and increased production costs for industry.

Recent views

Through the mid-1970s, it was alleged that none of the major macroeconomic models (Keynesian, New Classical, and monetarist) were able to explain stagflation.

Later, an explanation was provided based on the effects of adverse supply shocks on both inflation and output. According to Blanchard (2009), these adverse events were one of two components of stagflation; the other was "ideas"—which Robert Lucas, Thomas Sargent, and Robert Barro were cited as expressing as "wildly incorrect" and "fundamentally flawed" predictions (of Keynesian economics) which, they said, left stagflation to be explained by "contemporary students of the business cycle". In this discussion, Blanchard hypothesizes that the recent oil price increases could trigger another period of stagflation, although this has not yet happened (pg. 152).

Neoclassical views

A purely neoclassical view of the macroeconomy rejects the idea that monetary policy can have real effects. Neoclassical macroeconomists argue that real economic quantities, like real output, employment, and unemployment, are determined by real factors only. Nominal factors like changes in the money supply only affect nominal variables like inflation. The neoclassical idea that nominal factors cannot have real effects is often called monetary neutrality or also the classical dichotomy.

Since the neoclassical viewpoint says that real phenomena like unemployment are essentially unrelated to nominal phenomena like inflation, a neoclassical economist would offer two separate explanations for 'stagnation' and 'inflation'. Neoclassical explanations of stagnation (low growth and high unemployment) include inefficient government regulations or high benefits for the unemployed that give people less incentive to look for jobs. Another neoclassical explanation of stagnation is given by real business cycle theory, in which any decrease in labour productivity makes it efficient to work less. The main neoclassical explanation of inflation is very simple: it happens when the monetary authorities increase the money supply too much.

In the neoclassical viewpoint, the real factors that determine output and unemployment affect the aggregate supply curve only. The nominal factors that determine inflation affect the aggregate demand curve only. When some adverse changes in real factors are shifting the aggregate supply curve left at the same time that unwise monetary policies are shifting the aggregate demand curve right, the result is stagflation.

Thus the main explanation for stagflation under a classical view of the economy is simply policy errors that affect both inflation and the labour market. Ironically, a very clear argument in favour of the classical explanation of stagflation was provided by Keynes himself. In 1919, John Maynard Keynes described the inflation and economic stagnation gripping Europe in his book The Economic Consequences of the Peace. Keynes wrote:

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. [...] Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Keynes explicitly pointed out the relationship between governments printing money and inflation.

The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.

Keynes also pointed out how government price controls discourage production.

The presumption of a spurious value for the currency, by the force of law expressed in the regulation of prices, contains in itself, however, the seeds of final economic decay, and soon dries up the sources of ultimate supply. If a man is compelled to exchange the fruits of his labours for paper which, as experience soon teaches him, he cannot use to purchase what he requires at a price comparable to that which he has received for his own products, he will keep his produce for himself, dispose of it to his friends and neighbours as a favour, or relax his efforts in producing it. A system of compelling the exchange of commodities at what is not their real relative value not only relaxes production, but leads finally to the waste and inefficiency of barter.

Keynes detailed the relationship between German government deficits and inflation.

In Germany the total expenditure of the Empire, the Federal States, and the Communes in 1919–20 is estimated at 25 milliards of marks, of which not above 10 milliards are covered by previously existing taxation. This is without allowing anything for the payment of the indemnity. In Russia, Poland, Hungary, or Austria such a thing as a budget cannot be seriously considered to exist at all. Thus the menace of inflationism described above is not merely a product of the war, of which peace begins the cure. It is a continuing phenomenon of which the end is not yet in sight.

Keynesian in the short run, classical in the long run

While most economists believe that changes in money supply can have some real effects in the short run, neoclassical and neo-Keynesian economists tend to agree that there are no long-run effects from changing the money supply. Therefore, even economists who consider themselves neo-Keynesians usually believe that in the long run, money is neutral. In other words, while neoclassical and neo-Keynesian models are often seen as competing points of view, they can also be seen as two descriptions appropriate for different time horizons. Many mainstream textbooks today treat the neo-Keynesian model as a more appropriate description of the economy in the short run, when prices are 'sticky', and treat the neoclassical model as a more appropriate description of the economy in the long run, when prices have sufficient time to adjust fully.

Therefore, while mainstream economists today might often attribute short periods of stagflation (not more than a few years) to adverse changes in supply, they would not accept this as an explanation of very prolonged stagflation. More prolonged stagflation would be explained as the effect of inappropriate government policies: excessive regulation of product markets and labor markets leading to long-run stagnation, and excessive growth of the money supply leading to long-run inflation.

Alternative views

As differential accumulation

Political economists Jonathan Nitzan and Shimshon Bichler have proposed an explanation of stagflation as part of a theory they call differential accumulation, which says firms seek to beat the average profit and capitalisation rather than maximise. According to this theory, periods of mergers and acquisitions oscillate with periods of stagflation. When mergers and acquisitions are no longer politically feasible (governments clamp down with anti-monopoly rules), stagflation is used as an alternative to have higher relative profit than the competition. With increasing mergers and acquisitions, the power to implement stagflation increases. 

Stagflation appears as a societal crisis, such as during the period of the oil crisis in the 70s and in 2007 to 2010. Inflation in stagflation, however, does not affect all firms equally. Dominant firms are able to increase their own prices at a faster rate than competitors. While in the aggregate no one appears to profit, differentially dominant firms improve their positions with higher relative profits and higher relative capitalisation. Stagflation is not due to any actual supply shock, but because of the societal crisis that hints at a supply crisis. It is mostly a 20th and 21st century phenomenon that has been mainly used by the "weapondollar-petrodollar coalition" creating or using Middle East crises for the benefit of pecuniary interests.

Demand-pull stagflation theory

Demand-pull stagflation theory explores the idea that stagflation can result exclusively from monetary shocks without any concurrent supply shocks or negative shifts in economic output potential. Demand-pull theory describes a scenario where stagflation can occur following a period of monetary policy implementations that cause inflation. This theory was first proposed in 1999 by Eduardo Loyo of Harvard University's John F. Kennedy School of Government.

Supply-side theory

Supply-side economics emerged as a response to US stagflation in the 1970s. It largely attributed inflation to the ending of the Bretton Woods system in 1971 and the lack of a specific price reference in the subsequent monetary policies (Keynesian and Monetarism). Supply-side economists asserted that the contraction component of stagflation resulted from an inflation-induced rise in real tax rates. 

Austrian School of economics

Adherents to the Austrian School maintain that creation of new money ex nihilo benefits the creators and early recipients of the new money relative to late recipients. Money creation is not wealth creation; it merely allows early money recipients to outbid late recipients for resources, goods, and services. Since the actual producers of wealth are typically late recipients, increases in the money supply weakens wealth formation and undermines the rate of economic growth. Says Austrian economist Frank Shostak: 

"The increase in the money supply rate of growth coupled with the slowdown in the rate of growth of goods produced is what the increase in the rate of price inflation is all about. (Note that a price is the amount of money paid for a unit of a good.) What we have here is a faster increase in price inflation and a decline in the rate of growth in the production of goods. But this is exactly what stagflation is all about, i.e., an increase in price inflation and a fall in real economic growth. Popular opinion is that stagflation is totally made up. It seems therefore that the phenomenon of stagflation is the normal outcome of loose monetary policy. This is in agreement with [Phelps and Friedman (PF)]. Contrary to PF, however, we maintain that stagflation is not caused by the fact that in the short run people are fooled by the central bank. Stagflation is the natural result of monetary pumping which weakens the pace of economic growth and at the same time raises the rate of increase of the prices of goods and services."

Jane Jacobs and the influence of cities on stagflation

In 1984, journalist and activist Jane Jacobs proposed the failure of major macroeconomic theories to explain stagflation was due to their focus on the nation as the salient unit of economic analysis, rather than the city. She proposed that the key to avoiding stagflation was for a nation to focus on the development of "import-replacing cities" that would experience economic ups and downs at different times, providing overall national stability and avoiding widespread stagflation. According to Jacobs, import-replacing cities are those with developed economies that balance their own production with domestic imports—so they can respond with flexibility as economic supply and demand cycles change. While lauding her originality, clarity, and consistency, urban planning scholars have criticized Jacobs for not comparing her own ideas to those of major theorists (e.g., Adam Smith, Karl Marx) with the same depth and breadth they developed, as well as a lack of scholarly documentation. Despite these issues, Jacobs' work is notable for having widespread public readership and influence on decision-makers.

Responses

Stagflation undermined support for the Keynesian consensus. 

Federal Reserve chairman Paul Volcker very sharply increased interest rates from 1979–1983 in what was called a "disinflationary scenario". After U.S. prime interest rates had soared into the double-digits, inflation did come down; these interest rates were the highest long-term prime interest rates that had ever existed in modern capital markets. Volcker is often credited with having stopped at least the inflationary side of stagflation, although the American economy also dipped into recession. Starting in approximately 1983, growth began a recovery. Both fiscal stimulus and money supply growth were policy at this time. A five- to six-year jump in unemployment during the Volcker disinflation suggests Volcker may have trusted unemployment to self-correct and return to its natural rate within a reasonable period.

New Keynesian economics

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/New_Keynesian_economics

New Keynesian economics is a school of contemporary macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of new classical macroeconomics.

Two main assumptions define the New Keynesian approach to macroeconomics. Like the New Classical approach, New Keynesian macroeconomic analysis usually assumes that households and firms have rational expectations. However, the two schools differ in that New Keynesian analysis usually assumes a variety of market failures. In particular, New Keynesians assume that there is imperfect competition in price and wage setting to help explain why prices and wages can become "sticky", which means they do not adjust instantaneously to changes in economic conditions.

Wage and price stickiness, and the other market failures present in New Keynesian models, imply that the economy may fail to attain full employment. Therefore, New Keynesians argue that macroeconomic stabilization by the government (using fiscal policy) and the central bank (using monetary policy) can lead to a more efficient macroeconomic outcome than a laissez faire policy would.

Development of Keynesian economics model

1970s

The first wave of New Keynesian economics developed in the late 1970s. The first model of Sticky information was developed by Stanley Fischer in his 1977 article, Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule. He adopted a "staggered" or "overlapping" contract model. Suppose that there are two unions in the economy, who take turns to choose wages. When it is a union's turn, it chooses the wages it will set for the next two periods. This contrasts with John B. Taylor's model where the nominal wage is constant over the contract life, as was subsequently developed in his two articles, one in 1979 "Staggered wage setting in a macro model'. and one in 1980 "Aggregate Dynamics and Staggered Contracts". Both Taylor and Fischer contracts share the feature that only the unions setting the wage in the current period are using the latest information: wages in half of the economy still reflect old information. The Taylor model had sticky nominal wages in addition to the sticky information: nominal wages had to be constant over the length of the contract (two periods). These early new Keynesian theories were based on the basic idea that, given fixed nominal wages, a monetary authority (central bank) can control the employment rate. Since wages are fixed at a nominal rate, the monetary authority can control the real wage (wage values adjusted for inflation) by changing the money supply and thus affect the employment rate.

1980s

Menu costs and Imperfect Competition

In the 1980s the key concept of using menu costs in a framework of imperfect competition to explain price stickiness was developed. The concept of a lump-sum cost (menu cost) to changing the price was originally introduced by Sheshinski and Weiss (1977) in their paper looking at the effect of inflation on the frequency of price-changes. The idea of applying it as a general theory of Nominal Price Rigidity was simultaneously put forward by several economists in 1985–6. George Akerlof and Janet Yellen put forward the idea that due to bounded rationality firms will not want to change their price unless the benefit is more than a small amount. This bounded rationality leads to inertia in nominal prices and wages which can lead to output fluctuating at constant nominal prices and wages. Gregory Mankiw took the menu-cost idea and focused on the welfare effects of changes in output resulting from sticky prices. Michael Parkin also put forward the idea. Although the approach initially focused mainly on the rigidity of nominal prices, it was extended to wages and prices by Olivier Blanchard and Nobuhiro Kiyotaki in their influential article Monopolistic Competition and the Effects of Aggregate Demand . Huw Dixon and Claus Hansen showed that even if menu costs applied to a small sector of the economy, this would influence the rest of the economy and lead to prices in the rest of the economy becoming less responsive to changes in demand.

While some studies suggested that menu costs are too small to have much of an aggregate impact, Laurence Ball and David Romer showed in 1990 that real rigidities could interact with nominal rigidities to create significant disequilibrium. Real rigidities occur whenever a firm is slow to adjust its real prices in response to a changing economic environment. For example, a firm can face real rigidities if it has market power or if its costs for inputs and wages are locked-in by a contract. Ball and Romer argued that real rigidities in the labor market keep a firm's costs high, which makes firms hesitant to cut prices and lose revenue. The expense created by real rigidities combined with the menu cost of changing prices makes it less likely that firm will cut prices to a market clearing level.

Even if prices are perfectly flexible, imperfect competition can affect the influence of fiscal policy in terms of the multiplier. Huw Dixon and Gregory Mankiw developed independently simple general equilibrium models showing that the fiscal multiplier could be increasing with the degree of imperfect competition in the output market. The reason for this is that imperfect competition in the output market tends to reduce the real wage, leading to the household substituting away from consumption towards leisure. When government spending is increased, the corresponding increase in lump-sum taxation causes both leisure and consumption to decrease (assuming that they are both a normal good). The greater the degree of imperfect competition in the output market, the lower the real wage and hence the more the reduction falls on leisure (i.e. households work more) and less on consumption. Hence the fiscal multiplier is less than one, but increasing in the degree of imperfect competition in the output market.

The Calvo staggered contracts model

In 1983 Guillermo Calvo wrote "Staggered Prices in a Utility-Maximizing Framework". The original article was written in a continuous time mathematical framework, but nowadays is mostly used in its discrete time version. The Calvo model has become the most common way to model nominal rigidity in new Keynesian models. There is a probability that the firm can reset its price in any one period h (the hazard rate), or equivalently the probability (1-h) that the price will remain unchanged in that period (the survival rate). The probability h is sometimes called the "Calvo probability" in this context. In the Calvo model the crucial feature is that the price-setter does not know how long the nominal price will remain in place, in contrast to the Taylor model where the length of contract is known ex ante.

Coordination failure

In this model of coordination failure, a representative firm e_i makes its output decisions based on the average output of all firms (ē). When the representative firm produces as much as the average firm (e_i=ē), the economy is at an equilibrium represented by the 45 degree line. The decision curve intersects with the equilibrium line at three equilibrium points. The firms could coordinate and produce at the optimal level of point B, but, without coordination, firms might produce at a less efficient equilibrium.

 

Coordination failure was another important new Keynesian concept developed as another potential explanation for recessions and unemployment. In recessions a factory can go idle even though there are people willing to work in it, and people willing to buy its production if they had jobs. In such a scenario, economic downturns appear to be the result of coordination failure: The invisible hand fails to coordinate the usual, optimal, flow of production and consumption. Russell Cooper and Andrew John's 1988 paper Coordinating Coordination Failures in Keynesian Models expressed a general form of coordination as models with multiple equilibria where agents could coordinate to improve (or at least not harm) each of their respective situations. Cooper and John based their work on earlier models including Peter Diamond's 1982 coconut model, which demonstrated a case of coordination failure involving search and matching theory. In Diamond's model producers are more likely to produce if they see others producing. The increase in possible trading partners increases the likelihood of a given producer finding someone to trade with. As in other cases of coordination failure, Diamond's model has multiple equilibria, and the welfare of one agent is dependent on the decisions of others. Diamond's model is an example of a "thick-market externality" that causes markets to function better when more people and firms participate in them. Other potential sources of coordination failure include self-fulfilling prophecies. If a firm anticipates a fall in demand, they might cut back on hiring. A lack of job vacancies might worry workers who then cut back on their consumption. This fall in demand meets the firm's expectations, but it is entirely due to the firm's own actions.

Labor market failures: Efficiency wages

New Keynesians offered explanations for the failure of the labor market to clear. In a Walrasian market, unemployed workers bid down wages until the demand for workers meets the supply. If markets are Walrasian, the ranks of the unemployed would be limited to workers transitioning between jobs and workers who choose not to work because wages are too low to attract them. They developed several theories explaining why markets might leave willing workers unemployed. The most important of these theories, new Keynesians was the efficiency wage theory used to explain long-term effects of previous unemployment, where short-term increases in unemployment become permanent and lead to higher levels of unemployment in the long-run.

In the Shapiro-Stiglitz model workers are paid at a level where they do not shirk, preventing wages from dropping to full employment levels. The curve for the no-shirking condition (labeled NSC) goes to infinity at full employment.

In efficiency wage models, workers are paid at levels that maximize productivity instead of clearing the market. For example, in developing countries, firms might pay more than a market rate to ensure their workers can afford enough nutrition to be productive. Firms might also pay higher wages to increase loyalty and morale, possibly leading to better productivity. Firms can also pay higher than market wages to forestall shirking. Shirking models were particularly influential.Carl Shapiro and Joseph Stiglitz's 1984 paper Equilibrium Unemployment as a Worker Discipline Device created a model where employees tend to avoid work unless firms can monitor worker effort and threaten slacking employees with unemployment. If the economy is at full employment, a fired shirker simply moves to a new job. Individual firms pay their workers a premium over the market rate to ensure their workers would rather work and keep their current job instead of shirking and risk having to move to a new job. Since each firm pays more than market clearing wages, the aggregated labor market fails to clear. This creates a pool of unemployed laborers and adds to the expense of getting fired. Workers not only risk a lower wage, they risk being stuck in the pool of unemployed. Keeping wages above market clearing levels creates a serious disincentive to shirk that makes workers more efficient even though it leaves some willing workers unemployed.

1990s

The new neoclassical synthesis

In the early 1990s, economists began to combine the elements of new Keynesian economics developed in the 1980s and earlier with Real Business Cycle Theory. RBC models were dynamic but assumed perfect competition; new Keynesian models were primarily static but based on imperfect competition. The New neoclassical synthesis essentially combined the dynamic aspects of RBC with imperfect competition and nominal rigidities of new Keynesian models. Tack Yun was one of the first to do this, in a model which used the Calvo pricing model. Goodfriend and King proposed a list of four elements that are central to the new synthesis: intertemporal optimization, rational expectations, imperfect competition, and costly price adjustment (menu costs). Goodfriend and King also find that the consensus models produce certain policy implications: whilst monetary policy can affect real output in the short-run, but there is no long-run trade-off: money is not neutral in the short-run but it is in the long-run. Inflation has negative welfare effects. It is important for central banks to maintain credibility through rules based policy like inflation targeting.

Taylor Rule

In 1993, John B Taylor formulated the idea of a Taylor rule, which is a reduced form approximation of the responsiveness of the nominal interest rate, as set by the central bank, to changes in inflation, output, or other economic conditions. In particular, the rule describes how, for each one-percent increase in inflation, the central bank tends raise the nominal interest rate by more than one percentage point. This aspect of the rule is often called the Taylor principle. Although such rules provide concise, descriptive proxies for central bank policy, they are not, in practice, explicitly proscriptively considered by central banks when setting nominal rates.

Taylor's original version of the rule describes how the nominal interest rate responds to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP:

${\displaystyle i_{t}=\pi _{t}+r_{t}^{*}+a_{\pi }(\pi _{t}-\pi _{t}^{*})+a_{y}(y_{t}-y_{t}^{*}).}$

In this equation, ${\displaystyle \,i_{t}\,}$ is the target short-term nominal interest rate (e.g. the federal funds rate in the US, the Bank of England base rate in the UK), ${\displaystyle \,\pi _{t}\,}$ is the rate of inflation as measured by the GDP deflator, ${\displaystyle \pi _{t}^{*}}$ is the desired rate of inflation, ${\displaystyle r_{t}^{*}}$ is the assumed equilibrium real interest rate, ${\displaystyle \,y_{t}\,}$ is the logarithm of real GDP, and ${\displaystyle y_{t}^{*}}$ is the logarithm of potential output, as determined by a linear trend.

The New Keynesian Phillips curve

The New Keynesian Phillips curve was originally derived by Roberts in 1995, and has since been used in most state-of-the-art New Keynesian DSGE models. The new Keynesian Phillips curve says that this period's inflation depends on current output and the expectations of next period's inflation. The curve is derived from the dynamic Calvo model of pricing and in mathematical terms is:

${\displaystyle \pi _{t}=\beta E_{t}[\pi _{t+1}]+\kappa y_{t}}$

The current period t expectations of next period's inflation are incorporated as ${\displaystyle \beta E_{t}[\pi _{t+1}]}$, where ${\displaystyle \beta }$ is the discount factor. The constant ${\displaystyle \kappa }$ captures the response of inflation to output, and is largely determined by the probability of changing price in any period, which is ${\displaystyle h}$:

${\displaystyle \kappa ={\frac {h[1-(1-h)\beta ]}{1-h}}\gamma }$.

The less rigid nominal prices are (the higher is ${\displaystyle h}$), the greater the effect of output on current inflation.

The Science of Monetary Policy

The ideas developed in the 1990s were put together to develop the new Keynesian Dynamic stochastic general equilibrium used to analyze monetary policy. This culminated in the three equation new Keynesian model found in the survey by Richard Clarida, Jordi Gali, and Mark Gertler in the Journal of Economic Literature. It combines the two equations of the new Keynesian Phillips curve and the Taylor rule with the dynamic IS curve derived from the optimal dynamic consumption equation (household's Euler equation).

${\displaystyle y_{t}=y_{t+1}+{\frac {1}{\sigma }}(i_{t}-E_{t}\pi _{t+1})+v_{t}}$

These three equations formed a relatively simple model which could be used for the theoretical analysis of policy issues. However, the model was oversimplified in some respects (for example, there is no capital or investment). Also, it does not perform well empirically.

2000s

In the new millennium there have been several advances in new Keynesian economics.

The introduction of imperfectly competitive labor markets

Whilst the models of the 1990s focused on sticky prices in the output market, in 2000 Christopher Erceg, Dale Henderson and Andrew Levin adopted the Blanchard and Kiyotaki model of unionized labor markets by combining it with the Calvo pricing approach and introduced it into a new Keynesian DSGE model.

The development of complex DSGE models.

In order to have models that worked well with the data and could be used for policy simulations, quite complicated new Keynesian models were developed with several features. Seminal papers were published by Frank Smets and Rafael Wouters and also Lawrence J. Christiano, Martin Eichenbaum and Charles Evans The common features of these models included:

• habit persistence. The marginal utility of consumption depends on past consumption.
• Calvo pricing in both output and product markets, with indexation so that when wages and prices are not explicitly reset, they are updated for inflation.
• capital adjustment costs and variable capital utilization.
• new shocks
  • demand shocks, which affect the marginal utility of consumption
  • markup shocks that influence the desired markup of price over marginal cost.
• monetary policy is represented by a Taylor rule.
• Bayesian estimation methods.

Sticky information

The idea of Sticky information found in Fischer's model was later developed by Gregory Mankiw and Ricardo Reis. This added a new feature to Fischer's model: there is a fixed probability that you can replan your wages or prices each period. Using quarterly data, they assumed a value of 25%: that is, each quarter 25% of randomly chosen firms/unions can plan a trajectory of current and future prices based on current information. Thus if we consider the current period: 25% of prices will be based on the latest information available; the rest on information that was available when they last were able to replan their price trajectory. Mankiw and Reis found that the model of sticky information provided a good way of explaining inflation persistence.

Sticky information models do not have nominal rigidity: firms or unions are free to choose different prices or wages for each period. It is the information that is sticky, not the prices. Thus when a firm gets lucky and can re-plan its current and future prices, it will choose a trajectory of what it believes will be the optimal prices now and in the future. In general, this will involve setting a different price every period covered by the plan. This is at odds with the empirical evidence on prices. There are now many studies of price rigidity in different countries: the United States, the Eurozone, the United Kingdom and others. These studies all show that whilst there are some sectors where prices change frequently, there are also other sectors where prices remain fixed over time. The lack of sticky prices in the sticky information model is inconsistent with the behavior of prices in most of the economy. This has led to attempts to formulate a "dual stickiness" model that combines sticky information with sticky prices.

Policy implications

New Keynesian economists agree with New Classical economists that in the long run, the classical dichotomy holds: changes in the money supply are neutral. However, because prices are sticky in the New Keynesian model, an increase in the money supply (or equivalently, a decrease in the interest rate) does increase output and lower unemployment in the short run. Furthermore, some New Keynesian models confirm the non-neutrality of money under several conditions.

Nonetheless, New Keynesian economists do not advocate using expansive monetary policy for short run gains in output and employment, as it would raise inflationary expectations and thus store up problems for the future. Instead, they advocate using monetary policy for stabilization. That is, suddenly increasing the money supply just to produce a temporary economic boom is not recommended as eliminating the increased inflationary expectations will be impossible without producing a recession.

However, when the economy is hit by some unexpected external shock, it may be a good idea to offset the macroeconomic effects of the shock with monetary policy. This is especially true if the unexpected shock is one (like a fall in consumer confidence) which tends to lower both output and inflation; in that case, expanding the money supply (lowering interest rates) helps by increasing output while stabilizing inflation and inflationary expectations.

Studies of optimal monetary policy in New Keynesian DSGE models have focused on interest rate rules (especially 'Taylor rules'), specifying how the central bank should adjust the nominal interest rate in response to changes in inflation and output. (More precisely, optimal rules usually react to changes in the output gap, rather than changes in output per se.) In some simple New Keynesian DSGE models, it turns out that stabilizing inflation suffices, because maintaining perfectly stable inflation also stabilizes output and employment to the maximum degree desirable. Blanchard and Galí have called this property the ‘divine coincidence’.

However, they also show that in models with more than one market imperfection (for example, frictions in adjusting the employment level, as well as sticky prices), there is no longer a 'divine coincidence', and instead there is a tradeoff between stabilizing inflation and stabilizing employment. Further, while some macroeconomists believe that New Keynesian models are on the verge of being useful for quarter-to-quarter quantitative policy advice, disagreement exists.

Recently, it was shown that the divine coincidence does not necessarily hold in the non-linear form of the standard New-Keynesian model. This property would only hold if the monetary authority is set to keep the inflation rate at exactly 0%. At any other desired target for the inflation rate, there is an endogenous trade-off, even under the absence real imperfections such as sticky wages, and the divine coincidence no longer holds.

Relation to other macroeconomic schools

Over the years, a sequence of 'new' macroeconomic theories related to or opposed to Keynesianism have been influential. After World War II, Paul Samuelson used the term neoclassical synthesis to refer to the integration of Keynesian economics with neoclassical economics. The idea was that the government and the central bank would maintain rough full employment, so that neoclassical notions—centered on the axiom of the universality of scarcity—would apply. John Hicks' IS/LM model was central to the neoclassical synthesis.

Later work by economists such as James Tobin and Franco Modigliani involving more emphasis on the microfoundations of consumption and investment was sometimes called neo-Keynesianism. It is often contrasted with the post-Keynesianism of Paul Davidson, which emphasizes the role of fundamental uncertainty in economic life, especially concerning issues of private fixed investment.

New Keynesianism is a response to Robert Lucas and the new classical school. That school criticized the inconsistencies of Keynesianism in the light of the concept of "rational expectations". The new classicals combined a unique market-clearing equilibrium (at full employment) with rational expectations. The New Keynesians use "microfoundations" to demonstrate that price stickiness hinders markets from clearing. Thus, the rational expectations-based equilibrium need not be unique.

Whereas the neoclassical synthesis hoped that fiscal and monetary policy would maintain full employment, the new classicals assumed that price and wage adjustment would automatically attain this situation in the short run. The new Keynesians, on the other hand, see full employment as being automatically achieved only in the long run, since prices are "sticky" in the short run. Government and central-bank policies are needed because the "long run" may be very long.

Keynes' stress on the importance of centralized coordination of macroeconomic policies (e.g., monetary and fiscal stimulus) and of international economic institutions such as the World Bank and International Monetary Fund (IMF), and of the maintenance of a controlled trading system was emphasized during the 2008 global financial and economic crisis. This has been reflected in the work of IMF economists and of Donald Markwell.