Dear Editor
Dear Editor The New Economists Two questions for Marc Levinson regarding his article on t(The New Interventionist Economists" (NL, February 10), 1. He writes that "the events of the 1980s have...
...I do owe Milton Friedman an apology for my ill-phrased statement that he believes "government monetary or fiscal policy could not improve the nation's economic condition in the long run...
...Lastly, the psychological assumptions of economics mentioned above allow economists to adopt such theories as "rational expectations"—that all of us know what to expect of government policy, react rationally to that expectation, and thus government policy is unnecessary...
...Second, economists assume everyone has complete or adequate knowledge of markets, and therefore can rationally make the correct economic decisions...
...Mankiw's "menu cost" notion may have been acceptable in the 19th century, when price tickets and lists had to be hand written...
...Dear Editor The New Economists Two questions for Marc Levinson regarding his article on t(The New Interventionist Economists" (NL, February 10), 1. He writes that "the events of the 1980s have been devastating to monetarist arguments...
...In these circumstances human errors are inevitable, and unemployment and inflation problems could persist even in the long run...
...the most advisable policy" for maintaining a noninflationary full-employment state...
...Keynes' revolutionary analysis demonstrated that in both the long run and the short run, the trouble is not that the public has an inadequate grasp of information about the future...
...If firms or individuals tend to be completely informed, if they are rational, and if they tend to minimize cost (pain) and maximize revenue (pleasure), how is it possible for corporate mistakes to continually occur over a long period of time...
...The English economist Dennis Robertson, describing the fads of the economics profession, once said: "Now as I have often pointed out to my students, some of whom have been brought up in sporting circles, high-brow opinion is like a hunted hare...
...It may be true in the long run, but it may not be true in the short run...
...Furthermore, as Abraham Lincoln reminded us, rationality may be true of some individuals some of the time, but not of all individuals all of the time...
...2. George Ackerloff and Janet Yellin of Berkeley resurrect the old pre-Keynesian chestnut that people * 'are slow to realize" what is happening, while Martin Neil Baily of the Brookings Institution makes basically the same argument in contending that the information necessary for optimizing decisions (which he presumes exists) "doesn't get through"—i.e., in the short run people's information is imperfect, hence short-run unemployment can occur...
...Keynes clearly declared, "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...
...Princeton, N. J. Paul Davidson Professor of Economics, Rutgers University...
...For my own part, I doubt whether the political process will ever allow a better test, and it seems quite clear that rapid money supply growth since 1983 has not led to the inflation monetarists have repeatedly predicted...
...Human rationality, however, is never complete in the real world...
...Clearly, he believes that a specific sort of monetary policy could improve the nation's economic condition...
...W. Robert Brazelton Department of Economics University of Missouri...
...How can that experience provide evidence either for or against the monetarist proposition that "slow but steady monetary growth would end inflation while increasing unemployment only briefly...
...This view, which obviously reflects the philosophy of Levinson's new interventionists, is an unmistakable indication that neither he nor they have ever read Keynes' The General Theory...
...Although Keynes realized the world he lived in did not have flexible wages and prices, he felt it necessary to demonstrate that a hypothetical competitive economy did not operate efficiently...
...And he explicitly showed how flexible wages and prices were likely to perpetuate, rather than cure, unemployment problems in a free society (see chapters 19 and 20 of The General Theory, respectively entitled "Changes in Money Wages" and "The Theory of Prices...
...The real world often exposes the naivete of that "rational expectations" belief of many economists...
...1. Joseph Stiglitz and Carl Shapiro of Princeton argue that managers gladly pay excessive wages to reduce the cost of labor turnover—apparently without realizing this behavior is logically inconsistent with their assumption of profit-maximizing firms...
...Levinson and the new interventionists are wrong when they accuse Keynes of failing to demonstrate "why wages should not adjust quickly...
...With seeming relish he tells us, "One of Keynesianism's theoretical weaknesses has been its failure to demonstrate why wages should not adjust quickly in a well-functioning economy...
...Levinson thereby implies that Keynes identified sticky wages and prices as the flaws (or frictions) in the system responsible for bringing about involuntary unemployment...
...It is time that economists have a consultation with sociologists, social psychologists and psychologists...
...Rather, the trouble is that the future is uncertain (i.e., statistically unpredictable), so information about future sales and the like does not exist currently...
...Yet somehow some of our largest corporations, with substantial yearly losses, seem to have forgotten the minimization of cost assumption of economic theory...
...2. Has he read anything I have written...
...a state of economic bliss, with full employment and stable prices, will occur if only market forces are free to operate...
...Let us briefly examine these propositions...
...If all managers recognize that the cost of labor turnover at full employment is a real cost of doing business, then profit-oriented managers should deduct those costs from the wages offered, and thus lower their offerings so that the wages will not be "too high...
...This short-run recognition of problems yet long-run sanguine approach to economics was ridiculed by Keynes, who insisted "but in the long run we will all be dead...
...Milton Friedman Senior Research Fellow Hoover Institution To paraphrase George Santayana, those who do not study the history of economic thought tend to repeat the errors of the past...
...Such a belief was behind Hoover's slogan, "Prosperity is just around the corner...
...and/or because decision makers commit errors due to a lack of adequate information...
...But during the six years from 1980 through 1985 monetary aggregates fluctuated more widely than in any other six-year period since World War II...
...The Fallacies In his column on' 'The Pathetic Fallacy in Economics" (NL, November 4-18,1985), George P. Brockway exposes one underlying fallacy in modern economic theory: Instead of viewing the individual as simultaneously part consumer, part producer, part entrepreneur, et cetera, we economists think of the individual as either a consumer, or producer, or whatever fits or need at any specific moment...
...To judge from the caricature of my views that he presents— even more discrepant from the real thing than the caricature based on a bad photograph that introduces the piece—I would guess that the answer is no...
...Perhaps in the next decade the profession will return to, and try to build upon, Keynes' revolutionary analysis showing that a permanent stable money-wage system, combined with a managed exchange-rate system, is "the most advisable policy" for a civilized free society...
...Any serious attempt lo challenge monetarist dogma must at least demonstrate the same analytical rigor Friedman and others have brought to economics...
...editor, "Journal of Post Keynesian Economics" Marc Levinson replies: Whether the 1980s have provided an adequate test of monetarist theories I'll leave readers to judge...
...if you stand in the same place, or nearly the same place, it can be relied upon to come round to you in a circle.'' In the last half century, the economics profession has gone from support for Keynes' analysis—requiring long-run government intervention to cure what Keynes perceived as "the outstanding faults of the economic society in which we live"—to the monetarist revival of Adam Smith's laissez-faire philosophy, to a current rebirth of "interventionist economists" busy resurrecting the pre-Keynesian economic flaws and frictions as the factors preventing a competitive economy from functioning efficiently...
...When that happens, the economics profession will have discovered the research agenda now being developed by a school of economists known as the "Post Keynesians...
...I should rather have said he believes monetary and fiscal policies cannot be manipulated to increase output in the long run...
...3. N. Gregory Mankiw of Harvard has resuscitated the ancient argument that prices are sticky because the cost of printing new price stickers is frequently greater than the additional revenue that a change in prices will bring in...
...There is at least another basic and related underlying fallacy of economic theory to expose: its pre-Freudian psychological assumptions...
...Whatever the failings of the "new interventionist economists," their methodology promises to give their work an intellectual standing, and perhaps eventually a social influence, that Post Keynesians, in their arrogant rejection of that methodology, have failed to maintain...
...The new interventionists, using what Keynes described as pretentious "pseudo-mathematical methods of formalizing a system" have resurrected the pre-Keynesian twaddle that unemployment occurs in the short run because profit-maximizing entrepreneurs pay wages that are, in some vague sense, too high...
...In the long run, however, since the information exists, people must receive and process sufficient data for "rational" forecasts...
...in these days of computer controlled inventory lists and production lot codes, the cost of asking the computer to draw up new price lists has to be negligible...
...For confirmation, readers are advised to visit the annual meeting of the American Economics Association, where they will find the Post Keynesians off in a special room, talking to themselves...
...and/or because continuous price changes are too costly to record...
...All four disciplines might bo enriched...
...Third, it is assumed that "economic man" tends to minimize cost (pain) and maximize revenue (pleasure) at all times...
...Consequently, he said, "the maintenance of a stable level of money-wages is...
...Kansas City, Mo...
...Although the mathematical formalism Professor Davidson decries may have its shortcomings, it has, for better or worse, long since led to basic changes in the way economists analyze issues...
...This questionable assumption suggests that persons unable to balance a checkbook can somehow store the substantial knowledge of an entire economy in their brains at all times for instant use...
...So it apparently is with "The New Interventionist Economists" Marc Levinson reports on—those new stars of the economics profession who have rediscovered a pre-Keynesian inanity: If economic frictions exist that prevent a "world with flexible prices and perfect competition" from operating flawlessly, then government intervention can play a role in helping the economy avoid unemployment...
...Stanford, Calif...
...Levinson incorrectly asserts that Keynes' revolution in economic thought involved the recognition that prices were not perfectly flexible...
...He writes, "Keynes had seen a world with imperfect markets and prices that did not rise or fall freely...And later, "Along with sticky wages, sticky prices offer a key to the Keynes-nesian world...
...First, economists assume that each person, or "economic man," is completely rational...
Vol. 69 • March 1986 • No. 6
