At 04:10 PM 5/15/2002 -0400, you wrote:
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?)
[Clifford Poirot]
This is a point that is well made and on this, we have no
dispute.
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.
[Clifford
Poirot]
I do not think that is productive for us to
focus on our differing views of specific economists which is why I go into
detail below on what I think are the more interesting and significant
differences. It is true that the profession enforces conformity in a way
that other disciplines do not. But as Barkley noted, Stiglitz does not
represent the narrowest of mainstream theory, but rather, a significant
opening.
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.?
[Clifford Poirot]
Paul, as you are so fond of saying, I have never
beaten my wife and certainly have no intention of starting. This statement is
so far from the very clear meaning of my original assertions that it is
difficult to regard this question as nothing more than a cheap rhetorical
trick designed to make it appear that those who think that microeconomics
has significant ramifacations for macroeconomics must be anti-union, or at
best, logically anti-union, but inconsistent. See my further discussion on
related points below.
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,
[Clifford Poirot]
Does this not require working out a theory of income distribution?
Are you really suggesting that market power is not relevant for
determining 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
[Clifford
Poirot]
Do you really mean to say that If we only
have enough liquidity, all problems with Aggregate Demand and
Aggregate Supply wil be solved along with issues related to income
distribution?
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.
[Clifford
Poirot]
How can banks possibly ever have all this information, or even act
on it in a concerted manner if they did have this information? You seem
to assume that by providing enough liquidity, all possible
coordination problems between economic agents
will magically clear. And that is the real hocus pocus
here.
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.
[Clifford
Poirot]
The Enron case illustrates very well the
difference between asymmetric information and uncertainty. As I have said
before, the theory of asymmetric information describes the real
ontological system of differential power: Information is costly to obtain, and
some agents have more and better access to it than others. Ironically, any
intelligent accounting major at the undergraduate level could have accessed
SEC filings and figured out something was fishy, even if the details
would have been unknown. Because information is costly, investors depend on
security analysts, company reports about earnings and other sources of
information. As matters turned out, this information was
wrong.
It is possible however, to consider a
hypothetical case in which Enron had acted entirely
upright only to find that the bottom fell out of the energy
market in a way that could not have been
foreseen.
Uncertainty
does not mean that asymmetric information does not exist, or vice versa. The
concepts describe two different (though related) problems of people trying to
work out real problems in real economies in real
time.
What policy change would you
advocate to end a market imperfection that would assure persistent full
employment in any nation? Globally?
[Clifford
Poirot]
There is no *ONE* policy change that can
insure full employment nationally or globally. Yes, liquidity would help.
For that matter, debt relief would help the developing world, as well
as a change in priorities by the IMF and World Bank. Suffice it to say
for the sake of brevity, the problem of unemployment in developing countries
is often related to dual sectors and structural imbalances. In the U.S.,
promotion of full employment would require at the minimum an interest by the
FED and Congress, coordinated together, to promote full employment. What I
would define as full employment, would require, in a complex market economy
such as ours, one of two things-a willingness to live with persistent
inflation close to 10% or an overall incomes policy. Liquidity could be at
best, a part of the policy-not the entire policy. And even then, there is
no guarantee that AD policies would sufficiently address the
problems of structural unemployment.
I can offer the very sad case of
Portsmouth, Ohio as an exemplary real world case where technological
shifts have turned a booming, mini-industrial center into a
backwater Appalachian basket case. What would it take to lift Portsmouth
out of the slump? It would take a concerted, long term development
policy. As development economists like to point out, underdevelopment is a
complex, interdependent process that requires complex, interdependent policies
to address. Here again, expansion of local bank credit would
undoubtedly help-but it would not miraculously solve the problems. Nor
for that matter, would trying to revive industries that moved out 20
years ago.
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.
[Clifford
Poirot]
Imagine a model of the medieval sociocultural
system that failed to take these differences of power into account and you
have North and Thomas description in The Rise of the Western
World. I think that the contributions of the French Annales, of the
English Marxist Historians, of Economic Anthropologists on the Peasantry
contribute much more than North and Thomas in that particular
instance. I reference my dissertation "The Political Economy
Rural Social Change in Pre-Industrial
England" , University of Utah, 1992,
available from Ann Arbor Press, University of Michigan, or my much shorter
article on "Institutions and Economic Evolution" published in the JEI in
August, 1993. My difference with Marxists, and with other close cousins of the
Marxists, is that I am prepared to accept the existence of social heirarchies
under some circumstances. I agree with the Marxists and their close cousins,
that understanding the dynamics of power helps to explain how the system
actually operates. I recall, for example, that Goodwin developed a
predator-prey model to explain how unemployment and inflation could be
generated through conflict between capitalists and workers in a market
economy. Full employment would make this conflict and power differential
socially acceptable, IMO, from an ethical point of view. There is no question
that we both want full employment, the question is how do we get
there?
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.
[Clifford
Poirot]
I never said it would, and in fact,
getting to full employment would alter the income distribution to some
degree in and of itself. But, as I said
above:
"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."
Unfortunately, I have run out of time
with which to address the remainder of your points systematically. But I think
that I addressed some of your responses in my original post anyway. Stiglitz
and many other "Bastard" Keynesians have in fact agreed that flexible wages
and prices would stabilize the system. That does not mean that we need to
accept the assumption that markets will continuously and simultaneously clear
if only there is enough liquidity, mo matter what the other institutional
arrangements in society may be for working out the wage contract and setting
prices.
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.