Thoughts on Brad’s Thoughts on Economic Theology
Brad DeLong quotes Joseph Stiglitz and notes that Stiglitz disagrees with Keynes
a peculiar doctrine came to be accepted, the so-called “neoclassical synthesis.” It argued that once markets were restored to full employment, neoclassical principles would apply. The economy would be efficient. We should be clear: this was not a theorem but a religious belief. The idea was always suspect…
Brad notes that the peculiar doctine is due to Keynes, and that Milton Friedman agreed with Keynes. I add Paul Samuelson. He concludes with a question
But I, at least, cannot help but interpret the declining intellectual fortunes of Milton Friedman’s doctrine over the past generation as in large part a reflection of the fact that the Friedman-Keynes position is unstable: that one either follows today’s Republican Party and Prescottian Chicago School and becomes a market fundamentalist and thus for consistency deny that the government can do any good, or one moves toward a comprehensive skepticism of markets without an additional clever technocratic layer of regulation imposed in addition to property, contract, tort, criminal, and clever macroeconomic policy to make Say’s Law true in theory even though it is not true in practice.
Why this is the case I do not know. I am trying to think about it…
It is an important question and commenters are invited to try to help Brad. I try after the jump.
So why is the Keynes-Friedman-Samuelson position unstable ? I note that on the questions of public policy where they all agreeed, I tend to agree with them. However, I definitely do not believe in the neoclassical synthesis as described by Stiglitz. I don’t think that, even given full employment, markets are efficient. I tend to advocate leaving the market alone except for 1) redistribution from rich to poor 2) mandatory insurance is market insurance is prevented by the adverse selection death spiral 3) Pigouvian taxes to internalize externalities 4) aggregate demand management 5) Anti discrimination legislation and 6) I’m sure there are lots of other exceptions which don’t come to mind.
But that’s because I think the market is the worst possible way to organize economic interactions except for all of the others that have ever been invented. My inclination to leave markets along (except for 1-6) is based on mistrust of the state not trust in markets. I am sure that meddling will lead to interest group gridlock, advantages for the well connected (that is rich) captured regulators and so forth and so on.
So I have purely pragmatic reasons to consider aggregate demand management better than many other interventions. First it isn’t so very hard: I am convinced that many people could have done better than actual policy makers in the 30s and the past decade. Second there isn’t extreme conflict between different interest groups. Depressions and great recessions are bad for pretty much everyone. The improved policy would be better for equally many. The political problem is a problem with intellectual confusion and ideology, not those plus competing interests. It should be possible to achieve better macro policy.
Here I think a problem is that economists like to use models. The point of models is that they are similar enough to reality to be useful, but simple enough to understand. The problem is that they can’t, by definition, capture the relevant feature of reality which is that it is too complicated for us to understand and manage. A willingness to use models and take them seriously is inconsistent with the humility needed to conclude that the market is inefficient and we can’t improve on it.
Oddly, I think the key shared trait of Keynes, Friedman and Samuelson is a bit of modesty (I think I am the first to accuse any of the three of that) at least when compared to Prescott and Stiglitz.
“I definitely do not believe in the neoclassical synthesis as described by Stiglitz. I don’t think that, even given full employment, markets are efficient.”
Now now, but in the past perhaps? How about during the time Keynes referred to as “the greatest age of the inducement to invest” … “a period of almost one hundred and fifty years” — my guess: From 1776 to 1914, from Adam Smith to World War One.
How about then, sir?
I guess it’s not your fault if you haven’t heard my personal economic theology: the perfectly balanced labor market — wherein all other interactions are ultimately a result of consumer (yes, consumer) choice.
[cut and paste]
What I call a subsistence-plus labor market exists when employees have no mechanism with which to withhold labor from employers in attempt to extract the maximum price consumers may be willing to pay — pay levels set to suit employers needs only.
Examples: Fast food pays subsistence (or less). Starbucks — pays up a rung — a couple of dollars an hour more plus benefits for more yuppie-attuned employees (English as a first language). Starbucks employees may expect they are headed for better things (likely) — may be why they endure pay too close to bottom money. Whole Foods — up another rung — pays a couple of more bucks plus benefits (to the 80% who turn over) because it needs what Starbucks needs plus some additional industry.
My (un)favorite example of subsistence-plus is regional airline pilots whose pay and benefits may hover around Whole Foods level – with typically $100,000 educations and years of building flight hours – but who hope for much better things (which may be getting less hopeful all the time).
When employees whose wages extract the max consumers will pay have the opportunity to purchase products made by employees whose wage potentials are skinned (skimmed) under subsistence-plus, then, the labor price/value spectrum as assessed by consumers only becomes distorted. Ditto for any labor-price extraction differential.
If all employees were paid according to the maximum price their products could command from consumers – instead of too many by how little (how few rungs) above subsistence the boss can skin them – the working rubric would be: from each consumer according to their needs; to each employee according to their abilities. (You had it all backwards, Vladimir Ilyich. :-])
There is only one modality — introduced by legal mandate in late 1940s continental Europe, since picked up elsewhere in the world and established by the Teamsters Union National Master Freight Agreement in 1964 in the US — that ownership cannot work its ratcheting-down, subsistence-plus ways around: centralized bargaining – where all employees doing the same category of work in the same locale (nationwide where applicable) work under a single collectively bargained contract with all employers. (This should eliminate the use of scabs who don’t have a legal contract – I’ve never heard of scabs in Europe.)
My old Teamsters local 804 (left in 1970, age 26) recently won (as they like to phrase it) a 30-and-out retirement benefit of $3900 a month. Which may double what regional pilots earn while still active.
Time is a-waisting. A few years ago, Northwest Airlines squeezed a billion dollars in givebacks out of its major airline flight crews only to next year award a billion dollars in bonuses to a thousand of its execs. The pace on the road to serfdom may be speeding up. Help! Now!
An interesting post. I think an extra wrinkle in the tale is that what may work for arguably the most advanced economies (e.g. The USA) in terms of “minimum necessary government intervention” may not be enough for countries lower down the development ladder.
(c.f. Dani Rodrik, Ha-joon Chang)
The further wrinkle is that if we’re in some local rut regarding technological development (c.f. some secular stagnationists, Tyler Cowen) then you might also wonder if even the USA is actually at a stage where industrial policy can be eschewed.
The great danger is that in abstracting technology progress to a beneficial, stable black box (as most models tend to do) they ignore all the dirty tricks needed to actually keep technology investment and production moving…
Of course, then we’re out of the realm of science into history and praxis…
Implicit in my post is my perception that “industrial policy” is where a lot of economists draw the line on “reasonable interventions to keep the market running smoothly.”
As Brad notes, in lots of ways there is no bigger intervention than all the stuff we rely on around contract law and enforcement – so you can argue that the proposals I think are necessary aren’t that big a leap and still constitute “arrange a bunch of things and then leave the majority up to the market.”
RW, A RW mention by Krugman:
(Dan here….link tidied)
Well that link turned out really ugly. Anyway its over at his nyt blog titled “Synthesis lost”.
Your link worked and thank you.
“Oddly, I think the key shared trait of Keynes, Friedman and Samuelson is a bit of modesty (I think I am the first to accuse any of the three of that) at least when compared to Prescott and Stiglitz.”
That qualification is doing a heck of a lot of work! You left out Summers, Lucas and Mankiw, though. No, I don’t think that Keynes, Friedman and Samuelson were particularly “modest.” With regard to Keynes and Keynesianism, Fred Hirsch made some notable observations in “Social Limits to Growth.”
“A usually unstated but conscious assumption in Keynes’s own view of the system was that the macromanagers, the overseers of the system, were likely to be cleverer than the micromanagers, the overseers of its individual business units. A second underlying assumption was unconscious and taken for granted. This was the belief… that the macromanagers were guided by different, more elevated, motivations; and that these noble promptings would be reflected in the social environment in which their regulatory activities were conducted. Both assumptions were a product of the English polity in which those who challenged the old aristocratic legitimacy put at least equal emphasis on public service. American liberalism, by contrast, developed the doctrine of the interplay of plural and competing interests, which does not rest on these assumptions; it is thereby at once a more complex and a more exposed system.
“The Keynesian assumption about superior brains is not crucial to the success of managed capitalism, as clever controllers can set up a system that equally clever controllees will find it worthwhile to follow. But the second assumption, on the motivations of the controllers and their influence upon the social environment in which their policing is conducted, does have a critical place. It bears directly on the viability of the strategy itself. This problem has been curiously neglected.”
Krugman linked to your post this morning, Robert, and said he agrees with you. http://krugman.blogs.nytimes.com/2014/06/12/synthesis-lost-2/?_php=true&_type=blogs&_r=0.
I’m so jealous.
Non-economist here. But theology is the same word that occurred to me during Krugman’s analysis of carbon regulation and the report sponsored by the Chamber of Commerce on the costs to GDP. In a follow-up, Krugman said we KNOW that forcing power companies to build new plants will “probably” slow GDP growth.
If I decide to trade in my car even when it is economically efficient to continue driving my old car (ie, extra maintanance is not so high to make paying for new car less expensive in the long run), I contribute to an increase in GDP, right? Especially if I take out a loan to buy the new car, right?
Would it no longer cause an increase in GDP if the government was the one who told me that I deserve a fancy new car?
But isn’t that what Krugman is saying when he declares that we “know” that forcing power companies to engage in economic activity will slow the growth of economic activity?
Thank you Anna Lee, Dan and Beverly. I actually saw the link when I read Krugman’s post (I check several times a day to see if he has written anything new and I’m not ashamed to admit it).
Metatone — Ah yes that is item number 6) (lots of other exceptions). Much of the fun technology we use was first developed by the US government often by DARPA. Basic research produces general knowledge which can’t be patented so an externality. It sure seems that just paying for it directly works better than providing incentives.
We are communicating over what was once the ARPA net. I am using a touch pad not a DARPA invented mouse. The first computer was either the Mark 1 (US gov) Colossus (UK gov) the analytical engine (UK gov) or Eniac (US gov).
Aside from this gov that gov inventing this and that, we have some stuff from Bell Labs (transistors) and from private non profits like Oxford (Penicillin).
UW researcher Steenbock “invented” process to create vitamin D , effectively ending rickets, turned down a fortune by giving the patent back to UW WARF Foundarion .And Jonas Salk gave away a fortune after creating the first polio vaccine: He said “who owns the sun?” Pretty much an indictment of what we are now, dontcha think?
I wish we could stop using grandiose term like “the market”. First of all, economists have a bad habit of using “the market” to cover not just private systems for exchanging goods, but private enterprises that organize the production of goods. But publicly produced goods can be distributed via markets and privately produced goods can be distributed via non-market mechanisms. Referring to everything private as “the market” is distorting.
Also, there are lots of markets – not some single aggregate beast called “the market” – and there pretty much have alwasy been markets, even in those societies that that tried the hardest to do without them. But there are also lots of enterprises owned and operated by governments; and there are distribution systems that operate on principles other than market exchange. Even enterprises that are owned and operated privately are constrained to behave according to numerous rules established and enforced by governments, and in some cases structure the markets. And there is abundant historical evidence that both private and public enterprises and distribution mechansisms can, and have been very successful.
Even in the US, where that vaunted “Market” allegendly lives, the most spectacular economic growth occurred during the Second World War, when Americans had their most planned economy ever. All of the rich “capitalist” countries have availed themselves frequently of large-scale public enterprise, planning and strategic investment from time to time, often with very successful outcomes.
The idea that large scale planning is always doomed to failure seems incompatible with history. We should think more judiciously about how planning and organizational intelleigence have worked, when they have worked, and try to infer from those examples what thinks we can and should fruitfully plan at the governmental level, and what things we ought to leave to private enterprise and initiative. Of course it is hard to think about these questions in intelligent ways if our minds are strapped to unhistorical, other-worldly models of the economy in which planning and government organization don’t even exist.
All of us in the modern world live in complicated mixed systems that make use of both capitalist and socialist methods of production and distribution. Maybe it’s time for all of us to emerge from the shadow of 1989 and or mythological delusions about the cosmic events that supposedly occurred then. That wasn’t the year when “capitalism” won some Hegelian battle with its antithesis. It was a year in which one variety of mixed-up socialist-capitalist systems proved decisively more successful than a variety of systems that focussed somewhat more extremely on the socialist forms of organization.
what if we take economics to be secondary, and happyness primary ?
We know a lot , from psychologists, about what makes people happy: fair equal treatment, stability, etc
I think the problem with economics is that it should be secondary to psychology in how we think about organizing our society
I suspect that 100 years from now, the President will have a council of psychological advisors, and PhDs in econ will all be at the staff level.
I’m not sure that BD (and RW?) are drawing the correct inference from the Stiglitz quotation:
“In the aftermath of the Great Depression, a peculiar doctrine came to be accepted, the so-called “neoclassical synthesis.” It argued that once markets were restored to full employment, neoclassical principles would apply.”
This may have been the policy implication that the American neoclassical–and later “New Keynesian”–synthesis drew from Keynes. But in the relevant Chapter 2 of the General Theory, Keynes simply argued that classical economic theory was grounded on the assumption of full employment.
Denying that the assumptions underlying full employment were realistic, Keynes was in effect saying that conditions for classical theory were, in practice, unattainable. His was an argument for continuing technocratic government management of a perpetually disequilibrated economy. (More like Piketty, in fact. See also “the grouch’s” comment on BD’s original post.)
It was policy oriented American Keynesians like Samuelson who first argued that stimulus might achieve full employment and, as later New Keynesians, that monetary policy could manage employment at most times, except at ZLB.
Inflation was added as a/the primary policy concern, and full employment was defined as the “natural rate of unemployment” which meant, in effect, at whatever level policy makers felt was the “natural rate of inflation.”
It would be more accurate to say the neoclassicists took bits of Keynes, added a lot of their own notions–most especially “equilibrium,” which they hypostatized in a way that Keynes did not. (Samuelson invented the “Keynesian Cross.”)
Stiglitz condenses a lot of that history, but I don’t think he’s incorrect in implying that it wasn’t Keynes’ theory.
It is your prerogative to call Stiglitz arrogant, lump him together with a braindead rightwinger like Prescott and ignore all his technical work on asymmetric information. And it is not just my but ever sane economist’s duty to call people who do willfully ignore the incentive issues and welfare deviations from Arrow-Debreu that arise in all markets due to asymmetric information ignorant, dangerous fools.
I mean, gee, of course there is regulatory capture but this is not because government is evil per se, it is because the Reaganite revolution was successful. Just because it is not politically feasible economist should still advocate stuff like regulating nearly all markets. I prefer an imperfect regulation of food to no regulation at all.
@Tetraioc I have great respect for Stiglitz and his work. I teach it to my students. I did mention adverse selection in my incomplete list of 5 kinds of interventions I tend to support. I do not respect Prescott’s work. I noted what I perceive to be a similarity (extremely extreme self confidence). The bit about how no one else has accused Keynes, Krugman or Samuelson of modesty was my effort at humor. I think they are extremely self confident too.
I don’t think that anyone has ever contested the claim that Stiglitz is arogant. I haven’t spoken to him one on one, but when I heard him speak in public he struck me as very arrogant.
I certainly agree with Stiglitz that Stiglitz is incredibly smart and has a lot to say (same goes for Krugman and went for the late Samuelson and Keynes).
@jcb you haven’t engaged Brad at all. He presented a quote from the general theory. You haven’t addressed that quote at all in your comment. To write a serious comment on Brad’s post, you have to explain how the passage from The General Theory can be interpreted differently. Your argument is entirely based on the assertion that only chapter II is relevant The book has more than two chapters. The pasage Brad quoted is obviously relevant to the question. In fact, Brad didn’t even really interpret. He cut and pasted.