Re: Our 'imperfect' friends...

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

Ed,
     Interesting point.  But, I think that what you are
dealing with is the speed of transmission of information,
not its degree of asymmetry.  Why was information more
asymmetric in the past than today?  Everyone had
less information, and what was available moved more
slowly.  It is unsurprising that in a world of rapid information
transmission with asymmetric info, that the asymmetries
may in fact be effectively greater, and the volatilities
also greater, given the greater ease for herd behavior
and bandwagons and bubbles to get going.
     Having rational market software resolves nothing.
If the market involves irrational bubbles, then rational
market software is no help.  And, that information is
rapidly being transmitted does not mean it is accurate
information.  It may be market noise due to speculators.
Garbage in, garbage out.
     BTW, are you suggesting that greater wage and
price flexibility is stabilizing?   That sounds more like
a New Keynesian than a Post Keynesian argument.
Barkley Rosser
Professor of Economics and Kirby L. Kramer, Jr. Professor
James Madison University
Editor, Journal of Economic Behavior and Organization
----- Original Message -----
From: "Edward Nell" <nelle@xxxxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>; <cpoirot@xxxxxxxxxxx>; <pdavidson@xxxxxxx>
Sent: Thursday, May 16, 2002 10:38 AM
Subject: Re: Our 'imperfect' friends...


> 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
>
>
>