Arnold Kling imagines a conversation between Mr. C and Mr. K — a classical economist (C) and Keynesian economist (K):
K: See that man, Uri, sitting on the bench over there? He is involuntarily unemployed.
C: How do you know that? Do you know his reservation wage? That is, do you know the lowest wage that he would accept to go to work? Do you know what his best offer has been?
K: Yes. He won’t work for less than $12 and hour, and his best offer has been $11.50
C: So he is not really unemployed. He has withdrawn from the labor force, because he can’t find a job that will pay him what he wants.
K: No, according to the Department of Labor, as long as he is looking for work, he is unemployed. Besides, in his last job, he earned $14 an hour and what he produced was worth $15 an hour. But when the economy went into a slump, the demand at his firm fell, and he was laid off. His problem is that there is a lack of effective demand.
C: I’m not sure what ‘effective demand’ means, but ok. What should Uri be doing instead of sitting on the bench?
K: He could be digging a ditch for the government.
C: But he’d rather be sitting on the bench. Why should he dig the ditch?
K: The government can pay him to dig the ditch. They can pay him $12 an hour.
C: If his ditch-digging is worth $12 an hour, that’s fine. The taxpayers should be happy to pay Uri to dig a ditch if it’s a worthwhile use of his time.
K: Actually, the ditch is not worth so much. Let’s say his ditch-digging is worth only $5 an hour. But this way, he’s working instead of sitting on a bench, and as taxpayers we benefit from the ditch.
C: No! As taxpayers, we pay $12 and hour for ditch-digging that is worth only $5 to us. That makes us worse off.
K: Would you rather pay unemployment benefits of $8 an hour and get nothing?
C: No….But if we are going to redistribute income to Uri, why not encourage him to take the offer for $11.50 and pay him just $.50 an hour as a subsidy to do that?
K: Hmmm. Not such a bad idea. But the ditch-digging puts more spending into the economy.
C: No it doesn’t. You give $12 to Uri to spend, but that $12 comes from those of us who pay taxes, and now we have $12 less to spend. It’s just a transfer.
It continues.