Nilsson vs. Gentis debate

[Paul Davidson <PB108928%UTKVM1.BITNET@xxxxxxxxxxxxxxxxx>]

FROM:  Paul Davidson
"      Economics Department
"      523 Stokely Management Center  (615) 974-4221
I have enjoyed the Nilsson - Gintis debate, and have not butted in because
I thought excellent point were being made on both sides.
    Recently, however, Eric suggested that government cannot have adequate
information to perform optimal policy and rent-seeking proclivities of policy
makers are the "new" mainstream arguments against government interference.
   Herb indicates they are "good arguments". I think they are very poor ones--
and this is not because I claim the government can perform an "optimal policy
intervention" -- whatever that is. What government can do is act as a balance
wheel to assure that whenever there is a persistent lack of effective demand
or too much aggregate demand (a less often accomplishment in market-oriented
economies). In a civilized society where earning one's income through work
provides dignity and social and self esteem besides real income, it is the
function of government to do what the private sector has persistently failed
to do. That is a civilized policy--- whether that is an optimal policy
intervention or not I do not know! In fact in a world of nonergodic
circumstances, what decisions (allocatively speaking) that will prove optimal c
an never be known at the time the decision is made and action is taken.
      That is why employing workers to dig holes and fill them up again is
better than letting them remain idle (even if this violates NAIRU) if the
private sector can find no "good" (much less optimal) use of unemployed resourc
es.
     Herb responds to Randy Wray that he likes bastards or at least bastardizat
ions! (What's the difference between a donkey and a jackass?-))  This may expla
in much of Herb's position.
  Herb likes to use IS-LM curves. I use them in class also -- but not because
they are useful in providing guidelines to the real world whether dealing
with a closed economy or one involved in international finance. I use them as
the Rosetta Stone for students to understand mainstream think and compare it
with Post Keynesian and heterodox thinking.
   Herb have you ever ready Hicks's article "ISLM: An Explanation" in the
JOURNAL OF POST KEYNESIAN ECONOMICS, vol. 3., winter 1980-81, pp. 139-154. In t
his article Hicks indicates that he [Hicks] "has become dissatisfied with it
[theISLM diagram]" and that in his "reconstruction of Keynesian theory which
I published [in] ...(1974) it is not to be found." Hicks then goes on to
repudiate the ISLM diagram as a representation of Keynes's theory for a number
of reasons including its poor representation of the whole question of
liquidity preference, of stock and flow equilibrium analysis, and decision maki
ng under uncertainty! (At my insistence Hicks even made a footnote acknowledgme
nt of the importance of Shackle's work in this area.)
   If Herb still uses the IS-LM as a useful tool for understanding the real
worl when even the creator of that tool has foresworn it, then it may be
easier to understand some of Herb's responses to his inquistors.
   I am still uncertain as to what "supply-side constraints" (novel or otherwis
e) that Herb thinks limits growth in the global economy.
      Irma Adelman provided the following statistics in her paper "Long
Term Economic Development" (1991)
                Real GDP (ANNUALIZED GROWTH RATES)
Years          Real GDP per capita        Real GDP per capita
                 average allOECD nations   average all LDCs
1700-1820              0.2

1820-1913              1.2

1919-1940               1.9

1950-1973               4.9                    3.3

1973-1981               1.3


                            TOTAL REAL GDP

1950-1973                5.9                    5.5


The period between 1950 and 1973 was, according to Irma, "an era of unprecedent
ed sustained economic growth in both developed and developing countries."
At the same time global population grew dramatically (remember the baby boom in
the oecd nations and the great decline in mortality rates in ldcs as huge
accumulation of capital proceeded. (Note there was no supply-side shortages
despite the huge pressure of both real income growth and population growth.
In fact the real gdp of the ldcs grew at almost the identical rate as that of
oecd nations. Moreover Irma noted that the real rate of growth was almost
DOUBLE the PEAK rate of growth of the industrializing nations during the
industrial revolution from 1820-1913, while productivity growth was more
than TRIPLE that experienced by the industrializing nations during the
industrial revolution!
       Herb would suggest that the golden age broke down -- not because of
demand growth under high wage welfare states pushing for full employment but
rather some vague "supply-side constraints".
       What were these supply side constraints? QWell 1973 is associated
both with the breakdown of the Bretton Woods system and the oil price shock.
Herb dismisses the international dimension ("globalization of economies") as
the cause of the end of the Golden Age. Instead he suggests supply-side constra
ints.
   I have argued it was the breakdown of Bretton Woods (see my book PKMT) and
the golden age can be restored via my IMCU proposal. Herb dismisses this
possibility.
     Let me see what "supply-side" constraint? It is true that since 1973's
oil price shock the Maltusian element in economics has gained great visibility
(see the Club of Rome's projections in the 1970s vis-a-vis the actual
supply-side scaricities of raw materials. A comparision of predictions of what
we were going to be running out of (as estimated by rising relative real prices
vs. the actual real prices of these commodities in the 1990s is very interest
ing!.
     Since I had worked for a major oil company in the 1960s as the Associate
Director of the Economics Division and had also published an article in
the AER (1963) on the rate of exploitation and public policy problems of the
domestic crude oil industry, in 1973 Art Okun asked me to do a study of
crude oil supplies for the Brookings Panel. I inivted a younger colleague
(who had worked for another oil company) and a graduate student (who used
the study for part of his Ph. D. thesis to join in the project. While other
mainstreamers like Nordhaus were predicting real prices of $100 per barrel by
the 1990s, we forecasted a real price that would not be significantly
different from the $7 real price in 1973 -- and that could have been lower
if we could adopt policies to break the OPEC cartel.  Whatever the oil price
shocks were about they were not about the Mathusian supply constraint of
crude oil.  I am pleased to note that our Brookings Paper Study (1974) proved
to be more accurate even though it appears, from hindsight, to be more
pessimistic about oil supplies in the 1990s.
     I believe that a study of the Club of Rome's projections will also x.that
show they were wildly wrong about supply side constraints.
      So what supply constraint is Herb talking about if it is not a Malthusian

resource constraint? Can it be a shortage of capital due to a global shortage
of Savings? I hope he doesn't mean this classical canard!

Have a good day!____Paul Davidson
))))_ fax # (615) 974-1686