Re: My almost friend is not my enemy

[Paul Davidson <pdavidson@xxxxxxx>]

Just as the discussion is getting interesting, Cliff has run out of time
-- and I am off to a conference in Spain ---

At 09:58 AM 5/16/2002 -0400, you wrote:

Please see my responses below, which are set off from the text  in Italics. I am snipping significant parts of the exchange for brevity:

-----Original Message-----

From: Paul Davidson [mailto:pdavidson@xxxxxxx]

Sent: Wednesday, May 15, 2002 5:39 PM

To: Clifford Poirot

Cc: pkt@xxxxxxxxxxxxxxxx

Subject: Re: My almost friend is not my enemy

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.

paul:

GOOD!

 

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.

paul:

AND I SEE IT AS A WAY TO KEEP REAL INNOVATIVE MODELS OUT OF THE
MAINSTREAM VIEW -- ESPECIALLY WHEN THE UNORTHODOX ARE WILLING TO SAY --
WELL STIGLITZ HAS ALMOST GOT IT RIGHT --BUT NOT QUITE-- WITH HIS AD HOC
ARGUMENT.  EITHER WE WANT LOGICAL CONSISTENCY IN A MODEL OF
NOT!

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?

paul:

        

YES --AND
SIDNEY WEINTRAUB DID WORK OUT A THEORY OF INCOME DISTRIBUTION WHICH IS
COMPLETELY COMPATIBLE WITH KEYNES'S GENERAL THOERY---[THE AGGREGATE
SUPPLY CURVE IS BUILT UP ON THE DISTRIBUTION OF INCOME RELEVANT TO
MONOPOLY POWER, TECHNOLOGY, ETC. [FOR A VERY BRIEF DISCUSSION OF THIS
THEORY SEE CHAPTER S 10  AND 11 OF MY POST KEYNESIAN MACROECONOMIC
THEORY

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?

paul:
  Of course not -- as my PKMT makes clear.  to get the point of
effective demand (i.e., the intersection of aggregate demand and
aggregate supply -- with the latter having income distribution
implications--up to full employment --What is necessary is (1) to
stimulate private investment spending by animal spirited entrepreneurs by
creating liquidity that can be obtained at the lowest possible nominal
costs, (2) prevent the international sector from passing contagious
deflationary forces onto each nation's economy, and (3) if given the
public's propensity to consume, animal spirits private investment is not
sufficient to generate full employment, then the government should
undertake, with the cooperation of private initiative, deficit spending
on productivity enhancing quasi-public-private investment goods

 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.

paul:

THE ASYMMETRIC INFORMATION THEORY PRESUMES THAT THE ECONOMIC FUTURE IS
PREDETERMINED BY TODAY'S ECONOMIC FUNDAMENTALS  -- AND CANNOT BE
ALTERED BY ANY HUMAN ACTION.  ALL THE ASYMMETRIC INFORMATION THEORY
IMPLIES (ACCORDING TO STIGLITZ IN HIS 1989 ARTICLE ADVOCATING A TOBIN TAX
ON ALL FINANCIAL TRANSACTIONS) IS THAT THOSE WHO SPEND THE RESOURCES TO
GET THE INFORMATION WILL ALTER THE DISTRIBUTION OF THE FUTURE ECONOMIC
PIE -- BUT NOT [INSTIGLITZ'S OWN  WORDS] THE SIZE OF THE FUTURE
ECONOMIC PIE.  THIS REQUIRES STIGLITZ TO HAVE THE ERGODIC AXIOM
UNDERLYING HIS THEORY--- AND HENCE HE CAN NEVER "SEE"
UNCERTAINTY AS A RESULT OF NONERGODIC PROCESSES!!  

NONERGODICITY IMPLIES THAT INFORMATION ABOUT THE FUTURE DOES NOT EXIST
TODAY

   AND SO NO MATTER WHAT ONE SPENDS ONE CANNOT RELIABLE (IN  THE STATISTICAL  SENSE) INFORMATION ABOUT THE FUTURE -- THATS WHY "ANIMAL SPIRITS"  BECOMES IMPORTANT

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.



paul:  

WHEN YOU WRITE:
> Uncertainty does
> not mean that asymmetric information does not exist, or vice versa,
YOU ARE USING THE TERM UNCERTAINTY TO MEAN
"PROBABILISTIC RISK" -- AT LEAST IF YOU ARE GOING TO BE
LOGICALLY CONSISTENT.   

THIS ILLUSTRATES WHY I THINK THE STIGLITZ AD HOCRY -- PREVENTS TRULY
DIFFERENT IDEAS TO EMERGE-- SINCE ONCE YOU IMPLICITLY ACCEPT THE
ERGODICITY AXIOM -- YOU ARE TRAPPED IN CLASSICAL THEORY--THERE IS NO
OPENING FOR KEYNES'S UNCERTAINTY -- AND IT IS CLEAR FROM WHAT KEYNES
WROTE ABOUT TINBERGEN THAT HE HAD IN MIND THAT ECONOMICS WAS A
NONSTATIONARY SYSTEM (AND NONSTATIONARY IS A SUFFICIENT CONDITION FOR
NONERGODIC)!!

      

        

        

ASYMMETRIC INFORMATION BY YOUR DEFINITION IS LOGICASLLY
INCOMPATIBLE  WITH THE GT.

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.

BUT IF STIGLITZ IS TO BE BELIEVE THE SIZE OF THE FUTURE PIE IS ALREADY
DETERMINED BY TODAY'S FUNDAMENTALS AND THERE IS NOTHING CONGRESS CAN DO
TO CHANGE THAT.

> paul