Re: Our 'imperfect' friends...

["Edward Nell" <nelle@xxxxxxxxxxxxx>]

The New Keynesian themes - moral hazard, adverse selection, bounded
rationality, asymmetric information, internal labor markets,
'imperfections' generally - are designed to explain why markets do not
adjust quickly and rapidly in a stabilizing manner, through price and
wage movements.

A point made in 'transformational growth' studies - EJ Nell, GENERAL
THEORY OF TG, Cambridge; TG AND BUSINESS CYCLE, Routledge - is that most
of these imperfections were far more pronounced in the past, when
methods of communication were more primitive.  When the Sears catalogue
was delivered by Pony Express, information was more likely to be
asymmetrical.  When rationality was constrained by individual ability to
do arithmetic, it was far more bounded than it is today, given our
computers and rational choice software.  Modern communication and
transportation is cheaper and faster by far; the practical difficulties
in market adjustment are far less.  In so far as imperfections rest on
such factors we can expect them to be fewer and weaker today than in the
past.  But in the past, especially before World War I, prices and money
wages were flexible in both directions, and markets adjusted through a
price mechanism, while the general price level was stable.

The New Keynesian have it all backwards.


>>> Paul Davidson <pdavidson@xxxxxxx> 05/15/02 18:57 PM >>>
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 rticles. 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 vunerable 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 lst

>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 . inan 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 -- withot inflation and without  changing the industrial (and
labor
market) power structure.

Paul