Robert Waldmann | June 11, 2014 4:39 pm



Brad DeLong quotes Joseph Stiglitz and notes that Stiglitz disagrees with Keynes

Stiglitz said

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.