Re: My almost friend is not my enemy

[Paul Davidson <pdavidson@xxxxxxx>]

At 04:10 PM 5/15/2002 -0400, you wrote:
> 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 sorry if you thought this was a "grumble".  It
certainly was not meant to be.  The JEP was started because people
like me had objected to Presidents of the AEA that the AER would not
accept non-mainstream manuscripts.  [See George Bortz last letter as
Editor of the AER in response to people like me so lobbying the AEA
Executives.] The JEP title was specifically chosen to assure
different  PERSPECTIVES got equal treatment regarding each problem
discussed. My anecdote was to show how, unless non-mainstream economists
are on the Board of Editors of such journals different perspectives are
unlikely to be presented.  

ANYONE WANT TO CITE ISSUE IN THE LAST 5 YEARS WHERE DIFFERENT
PERSPECTIVES WERE PRESENTED -- RATHER THAN DISCUSSIONS BETWEEEN
TWEEDLEDEE AND TWEEDLE DUM
(

      

OR IS IT TWEEDLE
DUMB?)
 


>  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.


It is not b lind spots -- but as Heilbroner and Milberg argued in their
recent book -- a lack of any view but the narrowest of the
mainstream.

>  
> 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?


The question Cliff is if we passed and enforced  laws
preventing   exercise of monopoly power to prevent monopoly
power in labor markets)(including anti labor union legislation,  do you
really think we would eliminate unemployment,  etc.?

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

If we  reduced the power of labor unions  and inreasing
competition among workers --would you have a "better"
distribution of income? Again as someone who did his Ph. D. dissertation
on Income Distribution -- and a student of Sidney Weintraub who developed
Keynes's aggregate supply and demand analysis in his masterpiece AN
APPROACH TO THE THEORY OF INCOME DISTRIBUTION, 

I BELIEVE THAT BY GETTING KEYNES'S LIQUIDITY MESSAGE AND EFFECTIVE DEMAND
MESSAGE AS THE BASIC MODEL WE CAN SOLVE WHAT KEYNES SAW AS THE TWO MAJOR
FAULTS OF THE SYSTEM WE LIVE IN NAMELY ITS INABILITY TO PROMOTE FULL
EMPLOYMENT AND ITS ARBITRARY AND INEQUITABLE DISTRIBUTION OF INCOME AND
WEALTH 

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


Moral hazard is really a very classical ad hoc invention.  If the
monetary authority knew its business then as Keynes noted-- bank credit
is the pavement on which enterprise travels and if bankers knew their
business they would provide all the paving needed to keep industry going
at full employment.  

Adverse selection? That just asymmetric information hocus pocus!  If
people lie on their loan application, that is known as fraud and is
punishable under the criminal code  -as maybe we will see happens to
Enron and Anderson.  But I don't think that even Joe Stiglitz would
say that the Enron situation was an excellent case of 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.


What policy change would you advocate to end a market imperfection that
would assure persistent full employment in any nation? 
Globally?

>  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.

Of course but so what?  In the medieval feudal system there were
differences in power -- but the serfs never had to worry about being
involuntarily unemployed.... Nor do slaves in a slave economy! 
Power differences can be altered -- but I urge you to read the last
chapter of Keynes' GT regarding whether the two major faults of the
entrepreneurial system is due to differences in economic power-- As
Keynes pointed out it is better for society for a man to tyranize his
bank balance, then his neighbor.


> 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.


Lets get to full employment and then maintain such a state and then if --
in this full employment state -- you and society does not like the
resulting distribution of income and wealth, then lets change it. 
But just changing the distribution of income and wealth will NOT per se
create the full employment entrepreneurial society that I think is
desireable.

>  
> 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.

Nonsense . in an uncertain world,  "shocks" i.e., unknown
and unexpected future events will occur whether wages and prices are
perfectly flexible or fixed.  In fact, as even Frank Hahn and Bob
Solow suggested in a rfecent book, the Fixity of money wages and prices
are a stabilizing factor in a monetary economy.!


>  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.


Government response will be necessary whether prices are flexible or
fixed -- that is not the macroproblem!!!

>  
> 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. 
>  


No! I think Post Keynesianism means the adoption of Keynes's General
Theory model of aggregate supply and aggregate demand.  And as
Keynes pointed out in his response to Dunlop  and Tarshis in the EJ
in 1939 -- monopoly elements had nothing to do with it. 

Classical economists long before Keynes -- argued that monopoly problems
created unemployment and the business cycle.  If that is the essence
of your model --then you are just being an up-to date 19th century
classical economists -- and not a Post Keynesian.

There are interesting micro problems  involved in monopoly power --
but full employment problems are not one -- since as you may remember we
were able to achieve full employment during  WWII  and even the
Kennedy-Johnson years -- without inflation and without  changing the
industrial (and labor market) power structure.

Paul