Pkers Hahn and Solow?

[rvien@xxxxxxxxxxxxxx]

I just purchased Frank Hahn and Robert Solow's book _A Critical Essay on
Modern Macroeconomic Theory_ (MIT Press, 1995) and wondered if anybody had
any opinions on it. I've read the first chapter and lightly skimmed the
last so far.

Some quotes:

  'Chapter 2 is a good example...We insist on an essentially monetary
  economy...At this stage we stick to the assumptions of universal
  perfect competition and perfect (but only short-term) foresight...
  The adjustment dynamics are very badly behaved...A contractionary
  shock induces a fall in the nominal wage, and prices will normally
  follow. If the resulting deflation is sharp enough, the real interest
  rate must rise because the nominal interest rate cannot fall below
  zero. Investment is then depressed and the economy suffers an unnecesary
  fall in output...There is a clear role for stabilization policy ,
  even with perfect flexibility of wages and prices - in a sense *because
  of* wage and price flexibility."

  Chapter 5...is a formalization of the notion that excess supply of
  labor can persist because workers (and employers) regard wage undercutting
  as a violation of a social norm - as "unfair...We go further by
  exhibiting such behavior as an equilibrium strategy for a repeated game...
  Any of these non-Walrasian models will yield a locus of real wage rates
  and employment levels that leave the labor market in equilibrium from
  the supply side...higher employment goes with a higher real wage."

  Much contemporary macroeconomic theory leaves the impression that
  unemployment and recession are primarily the result of excessive
  rigidity of wages and prices...If only the artificial barriers to
  wage and price flexibility were removed - by the weakening of trade
  unions and the deregulation of industry and trade - the market
  mechanism would see to it that the labor market cleared...We have no
  sympathy with either view.

  It is then no great trick to show that a little sluggishness in wage
  adjustment can actually be stabilizing for the economy.

  But even under perfect competition there is doubt that the demand curve
  has been correctly specified in the literature...It now follows that
  even here the demand for labor depends on the demand for goods. In that
  case [constant returns to scale - RV] higher employment need not entail
  lower real wages.

  The demand curve most frequently found in the literature seems to be the
  "steady-state" demand curve...But it is, as we now know, almost too easy
  to justify economies with a multiple steady-state equilibria...In that
  case there are multiple demand curves for labor, and it is perhaps
  unnecessary to spell out why a simple relation between employment and the
  real wage is not to be had.

  ...with the consequences of imperfect competition for labor demand. In
  such a regime it makes no sense to ascribe unemployment to the cause:
  "real wages are too high." Real wages are what firms, with given demand
  expectations and facing a given money wage, make them. If [demand] were
  higher and production is subject to diminishing returns, employment
  would be higher and real wages lower. But it would be nonsensical here
  to maintain that a reduction in real wages *causes* employment to be
  higher; one is reading off the (real wage-employment) pair from an
  equilibrium relation that does not include a clearing labor market.

  We have been intent to take advantage of the imperfect competition
  setting to allow for increasing returns to scale...Then, of course,
  real wages and employment may be...positively related...Real wages
  and employment are *both* endogeneous variables. But equally interesting
  to us has been the ease with which both multiple steady-state equilibria
  can be constructed and how these depend on the beliefs of agents...
  Practical economists and politicians...seem all along to have been
  aware of the relevance of "confidence."

  Our own particular hobbyhorse is that there may be several equilibrium
  (natural?) levels of employment and unemployment in a reasonable...model.
  there may be a whole interval of levels of unemployment, any one of
  which could be an equilibrium with the *same* real wage. The equilibrium
  real wage could have a large element of convention (or history dependence)
  about it

  The course of events may be controlled by the dynamics, and therefore
  by the beliefs and expectations of firms and households.'

So is this the economics of Keynes? I suspect Barkley Rosser and Paul
Davidson will have different answers. I also expect to not approve of
Hahn and Solow's treatment of money and capital. However, they are
explicit about choosing some of their assumptions as near as possible
to the New Classical economics following Lucas, thereby providing an
internal critique. So can Post Keynesians declare victory?


Robert Vienneau                  Whether strength of body or of mind, or
rvien@xxxxxxxxxxxxxxxxxxxxx      wisdom, or virtue, are always found...in
                                 proportion to the power or wealth of a man
                                 [is] a question fit perhaps to be discussed
                                 by slaves in the hearing of their masters,
                                 but highly unbecoming to reasonable and
                                 free men in search of the truth.
                                              -- Rousseau