|
I have a lot of agreement with what Chip
says here.
At the risk of coming across as a namby-pamby
"let's
all be friends" airhead, I would say that both
Davidson
and Stiglitz are right.
1) Paul is right that Joe
fails to understand the fundamental
nature of uncertainty and continues to retain too much of
a
belief ultimately in a classical equilibrium
model.
2) Joe is right that
asymmetric information is very
important, indeed fundamental, and should be dealt
with
when and where it can be.
3) Paul is right
that it is useful to show that problems
can arise even with not monopoly power and completely
flexible prices.
4) Joe is right (de
facto) that given that asymmetric
information cannot be eliminated it is still worthy to
consider
its implications.
5) I am sympathetic with
Paul's unhappines with Joe's
dismissal of his IMCU proposal, although in the context
we
can understand that it was not politically acceptable at
that
point (and may never be).
6) At the same time, Chip is
right that Paul's proposal
would not eliminate asymmetric information and the
related
woes that arise from it and that the kinds of
"transparency"
proposals put forward by Joe would help with these, even
if
they would not completely eliminate them.
Barkley Rosser
----- Original Message -----
Sent: Wednesday, May 15, 2002 4:10
PM
Subject: Re: My almost friend is not my
enemy
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).
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
fax: (865) 974-4601/ (865) 974-1686
home phone and fax (865)
692-0802
|