Thursday, June 5, 2014

Learning about Learning about "New Keynesianism"

Mark Thoma links to Joseph Stiglitz's TIGER Forum 2014 lecture on "Creating a Learning Society":



Is our society learning if what we are taught is "false and misleading?"

May 30, 2014

Dear Professor Stiglitz,

I am conducting historical research on Alfred Marshall's conception of the efficiency wage and how it relates to the contemporary sense of the term. In the course of my research, I have come across a claim that you made in 1984 that I wonder if you could clarify. You wrote, in "Theories of Wage Rigidity" (1984): "It is widely recognized that the assumption that wages are rigid is central to Keynes' explanation of the persistence of unemployment." In contrast, in chapter 19 of the General Theory, Keynes wrote, "[T]he Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment…. In its crudest form, this is tantamount to assuming that the reduction in money-wages will leave demand unaffected.… It is from this type of analysis that I fundamentally differ…"

It seems clear from the discussion in chapter 19 as a whole that Keynes rejected the hypothesis that rigid money wages were to blame for persistent unemployment. It would be possible to parse your sentence as ambiguous on the question of whether it was the assumption or the rejection of the assumption that "is central to Keynes' explanation." But of course the context of your article and of contemporary efficiency wage theory in general would seem to resolve any ambiguity. Was it your position, in 1984, that Keynes's explanation relied on the assumption that wage rigidity was to blame for the persistence of unemployment? If it was, is that still your position? If it wasn't your position -- or if your position has changed since then -- have you clarified that in any subsequent article? I thank you for any information you can provide on this matter.

Cheers,

Tom Walker
"It is widely recognized that the assumption that wages are rigid is central to Keynes' explanation of the persistence of unemployment." Joseph E. Stiglitz 1984.

"[T]he Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment…. In its crudest form, this is tantamount to assuming that the reduction in money-wages will leave demand unaffected.… It is from this type of analysis that I fundamentally differ…" John Maynard Keynes 1936.
O. F. Hamouda writes:
"Given the enormous literature on Keynes and Keynesianism and the flippant way in economics in which consensuses are formed to become the truth, there is need for a concordance to be undertaken to compare, in the light of this book, what was said at the source, what was ascribed first-hand as having been said, and then what was made second-hand of those accounts, multiplied over and over. There is a delightful abundance of aberrations… …it is not claimed that everyone, everytime, everywhere should always run back to the sources nor, as Hicks once said, that the source should be taken as divine, but when a claim is made, it must be able to stand, as few presently do."
One of the aberrations Hamouda cites is:
"It is widely recognized that the assumption that wages are rigid is central to Keynes' explanation of the persistence of unemployment." Joseph E. Stiglitz 1984.
Paul Davidson also pointed out the New Keynesian reversal of Keynes's position in "Would Keynes be a New Keynesian?" Eastern Economic Journal, Vol. 18, No. 4 (Fall, 1992), pp. 449-463.
"The principle of a truth in labeling law that protects consumers from false and misleading claims is often violated by economics textbooks. Under the truth in labeling law, a minimum quantity of beef is required in a patty before society permits anyone to sell it as a hamburger. Similarly some minimum quantity of Keynes's logical analysis should be an essential ingredient in any theory sold as Keynesian, especially in textbooks to yet uneducated consumers.

"Paraphrasing a famous slogan of the 1988 Democratic presidential primary, 'Where's the Keynesian beef in New Keynesian economics"? This paper demonstrates that (1) New Keynesian Economics (hereafter NKE) does not contain any of Keynes's logical building blocks, and (2) NKE leads to policies that are the opposite of what Keynes advocated as solutions to the major problems facing real world economies."
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"...Keynes specifically denied that fixed nominal wages and prices were a necessary condition for underemployment equilibrium. One complete chapter of The General Theory demonstrates why the existence of instantaneously flexible money wages can not assure full employment - even if no coordination failures exist. 'For the Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on the assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment ...My difference from this theory is primarily a difference of analysis'. In the fourth section, it will be shown that Keynes's use of wage units to measure his aggregate functions brings to the foreground this "difference of analysis" by requiring the feedback effects of flexible wages be traced on components of aggregate demand. These feedback effects had nothing to do with coordination failures!

"Keynes's chapter 19 analysis demonstrates that complete wage (or price) flexibility was neither a necessary nor a sufficient condition for full-employment equilibrium. Keynes's two major conclusions regarding the effect of instantaneously flexible money wages - even in condition of purely competitive supply - are that "there is, therefore, no ground for the belief that a flexible wage policy is capable of maintaining a state of continuous full employment" and that "to suppose that a flexible wage policy is a right and proper adjunct of a system which on the whole is one of laissez-faire, is the opposite of the truth".

"Consequently, anyone selling New Keynesian theoretical patties, in which the fixity of nominal wages or prices is the main ingredient, to students (or uneducated policy makers) would not get a franchise to use his name from the originator of Keynesian economics."

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