Re: My almost friend is not my enemy

[Paul Davidson <pdavidson@xxxxxxx>]

At 09:55 AM 5/15/02 -0400, you wrote:
> I have argued in the past ( now in print in
> two places as of June) that
> Stiglitz is guilty of the sin of theoretical inconsistency on a number
> of
> points.
>
> That said, in many ways Stiglitz is probably the best of the New
> Keynesians
> and has developed models that are in many ways consistent with at least
> some
> Post-Keynesian directions in research. For example, Stiglitz' work on
> credit
> rationing is certainly consistent with the view of some Post-Keynesians
> that
> credit markets can be "lumpy" and that agents might have to
> resort to rules
> of thumb in decision making. Of course, it would be good if Stiglitz
> would
> move from here to full acceptance of uncertainty.


A brief anecdote -- When Joe Stiglitz (who I have known personally since
1973) was editor of the JOURNAL OF ECONOMIC PERSPECTIVES, he had in the
first issue an article by Mark Machina regarding uncertainty and
probability -- where Machina took the standard mainstream line.. 
When I objected to Joe (and Bill Baumol who was on the AEA Executive
Committee at the time) that PERSPECTIVES was a plural word, and that the
Editor had not invited others perspectives including both the Post
Keynesian and the Austrian perspective to appear  -- I heard little
from Joe in response.   Ultimately.u I got a letter indicating
receipt of my complaint and asking if I was interested in writing a
response?  I indicated that I was but that the JEP only accepted
manuscripts that had been invited and so I asked if this letter was an
invitation since I never thought of an interrogatory sentence as a
invitation.  There was no response to this inquiry regarding whether
the Editor was inviting me to submit a paper on probability and
uncertainty.

But at an AEA convention Bill Baumol told me that the committee had taken
up the matter and asked if Joe had contacted me. I indicated what had
happened.  A few weeks later I did get an invitation and I dutifully
wrote a manuscript on the Post Keynesian perspective on uncertainty and
probability theory.

Timothy Tyler who was Stiglitz's assistant rejected the manuscript
indicating that the Editor thought it  was not worthy -- and
suggested where I had either mistaken the mainstream or was just
wrong.  I wrote back indicating I would revise the manuscript to
cover the points that the Editor had raised to indicate why the Post
Keynesians had a different view, etc.  Ultimately, this manuscript
went through 2o revisions -- before I finally phoned Joe and asked
whether he really wanted a Post Keynesian perspective or whether he, as
the editor, want a Post Keynesian to wrote a mainstream perspective on
the problem.  He asked for another revision --which I wrote and this
21 revision was finally published-- (with some footnotes  
where I respond directly to the Editor's suggestion of being wrong on a
specific point several years after the original Machina article was
published.. 

So much for Joe being willing to "move from here to
full acceptance of uncertainty."

> Stiglitz conception of the Microeconomy as
> characterized by non-market
> clearing, imperfect competition is at least not inconsistent with views
> of
> the Microeconomy advanced by heterodox economists such as Ingrid
> Riima.

No one denies that their is monopolistic elements in both the product
market and even the labor market.  The question is not the
microeconomics -- but whether even if there was pure competition would we
still face the problems of persistent unemployment, slow  growth or
even declines in standards of living. balance of payments (Thirlwall's
Law) problems, etc.  If as a theoretical point one can demonstrate
that even IF the economy was competitive, these problems still would
occur, then the policy solutions is not to "loosen up" or
liberalize the financial markets, the labor market, or improve current
information (transparency),etc.

Elsewhere I have suggested that those who argue that monopolistic
elements are the fundamental cause of these problems and believe in 
"loosening" labor movements, etc are espousing "the
laxative theory to economic bliss".

> I will grant everyone on here
> that Stiglitz is not the second coming of
> Keynes. But is he really our enemy-or is he almost our friend?

With friends like Joe -- who still believe in the fundamental axioms of
the classical model [the axioms of the long-run neutrality of money, the
ergodic axiom, and the gross substitution axiom ], who needs enemies --
remember the enemy of my enemy is NOT necessarily my friend!

As long as Stiglitz insists that merely putting ad hoc constraints on the
classical theoretical model, while accepting the 3 basic classical axioms
listed above, Stiglirz is the enemy of those of us who, like Keynes,
believe that the fundamental axioms or  

"postulates of the classical theory  are applicable only
to  a special case and not the general case....the characteristics
of this special case assumed by classical theory happen not to be those
of the economic society in which we actually live, with the result that
its teaching is misleading and disastrous if we attempt to apply it to
the facts of experience" (GT, p. 3)

With friends like Joe Stiglitz we do not need enemies, for he believes
that mainstream theory modified by some short-run ad hoc constraints can
explain the economy and will permit , in the long-run , an
efficient  free market solution.  If anyone doubts this they
should read Joe's argument for a Tobin Tax.

As long as Joe seems to be against neo-liberlism classical economics, he
has enough public attention so that no one will take seriously attempts
to develop Keynes's REVOLUTIONARY  approach -- where money (as
Keynes wrote in 1935) is NEVER neutral in either the short-run or the
long run and even with  p=mc pure competition pricing.

In the 1940-70s, neoclassical synthesis Keynesians such as Samuelson,
Solow, Modigliani and even Tobin -- played the same role in aborting
Keynes's revolution when they accepted these basic classical axioms (see
Samuelson's FOUNDATIONS OF ECONOMIC ANALYSIS).

One further anecdote.  In1998 after the Asian Crisis and the Russian
default, even Clinton was calling for a new financial architecture (As
was Stiglitz as another posting on this list showed).

since my already published IMCU plan was a new financial architecture
proposal, one day I got a phone call inviting me to a hurriedly called
special meeting in Geneva where IMF, World Bank, central bankers of the
G-26, and a few academics were to discuss the potential for international
financial market disaster -- and what to do about it.

Joe Stiglitz was representing the World Bank -- and his call for a new
financial architecture was a call for "transparency" and
installing clauses in all international contracts for work-out
procedures   between the debtor and the creditors.

When I suggested that a new financial architecture should attempt to
prevent systemic and (contagion) bankruptcies -- rather than try to work
out solutions after the damage was done... the IMF and World
bank   representatives thought that such an idea was "off
the wall".

> Stiglitz has made a lot of
> interesting theoretical contributions, that IMO,
> are useful to some directions in Post-Keynesian
> research.

I beg to disagree.

Paul

Paul Davidson

Editor, JOURNAL OF POST KEYNESIAN ECONOMICS

Economics Department - University of Tennessee

523 SMC

Knoxville, Tennessee 37996-0550

work phone: (865) 974-4221

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home phone and fax (865) 692-0802