Re: My almost friend is not my enemy

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

I will respond in sequence to the points raised by Paul below in response to my original e-mail:

1) I find Paul's recounting of his experiences with Stiglitz as a journal editor to be interesting. I am not sure if they mean anything other than an interesting insight into publication of journal articles. I certainly cannot fault Paul for a little grumbling-after all, I have grumbled under my breath on occasion about revisions I have had to do for journals that were receptive to my overall point of view. I am not surprised that Stiglitz has problems with uncertainty because as I have noted, I find Stiglitz' lack of acknowledgement of this issue to be perplexing and inconsistent with other things he has written. Which is to say, that we all have our theoretical blind spots.

 

2) Probably the more interesting point is the significance for macroeconomics of microeconomic "imperfections". Let me turn this around-suppose Central Banks always and everywhere insured the liquidity of the system and the international system adopted Paul's IMCU proposal: Does this mean that markets would then experience continuous clearing and generate full employment, that wage contracts would not be subject to power differentials, that economies with substantial degrees of market power would not be vulnerable to oil price shocks?

 

Would the conflict between workers and factory owners over wages and shares of Income disappear or cease to have relevance for the macroeconomy?

 

Would banks never suddenly get cold feet about lending prospects to different categories of borrowers? Would we eliminate moral hazards and adverse selection?

 

One thing I will say for Paul is that my periodic exchanges on this list have helped to sharpen my own thinking about why I think market imperfections really matter for macroeconomic outcomes. First and foremost,  market imperfections reflect a fundamental reality about complex industrialized societies that is as important as uncertainty, and that is the difference in power. Oligopolies, adverse selection, principal agent conflicts, asymmetric information are all real properties of a system in which people have differential access to power over economic resources. Since market economies function through the mediation of institutions, understanding how institutions function is vital to understanding how real world economies function.

 

There is a simple lesson though, that is illustrated in any "Keynesian"  principles text (specifically in Stiglitz principles text in Chapter 8): Rigid wages and prices mean that the economy is particularly vulnerable to both supply and demand side shocks. It does not follow however, that flexible wages and prices would improve the system, as income adjustments are equally likely. In effect, rigigities are a permanent, built-in component of the system, which means that it is more "efficient" to respond with government macroeconomic policies than by trying to force workers to accept draconian cuts in wages.

 

3) Paul disagrees that Stiglitz has made contributions that could be of interest to Post-Keynesians. Paul and I disagree, I think, more than anything, on the definition and meaning of Post-Keynesianism. Paul is a fundamentalist who wants to reduce Post-Keynesianism to an axiomatic approach. I am a "Dowist" who things that Post-Keynesianism should follow a "babylonian" strategy. Complex systems call for complex approaches.

 

At one point in graduate school, I got very annoyed with Andrew Kliman for making fun of Post-Keynesians and Neo-Ricardians by stating that Post-Keynesians and Neo-Ricardians thought that we knew class struggle was important because of the maximum eigenvalue (or something similar-it was a long list that did not amuse me at the time). However, as I think back on it, I see the humor and validity (though note that Marxism can be equally reduced to a set of humorous propositions) of poking fun at a Post-Keynesianism that says "History Matters" but reduces History Matters to a curt dismissal of narrative structure and incorporation of uncertainty into an abstract, mathematical, axiomatic formula.

 

It is not just History that matters, but also, Institutions and how they interact with markets (which are themselves institutions).

-----Original Message-----
From: Paul Davidson [mailto:pdavidson@xxxxxxx]
Sent: Wednesday, May 15, 2002 2:41 PM
To: pkt@xxxxxxxxxxxxxxxx
Cc: pkt@xxxxxxxxxxxxxxxx
Subject: Re: My almost friend is not my enemy

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

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Knoxville, Tennessee 37996-0550

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