The Breakdown of the Neo-Classical Synthesis

Brad DeLong, Robert Waldman and Paul Krugman are having a conversation about the breakdown of the so-called "Neo-classical synthesis."  The conversation begins with Joseph Stiglitz at the Minsky lecture in 2009:

The advocates of free markets in all their versions say that crises are rare events, though they have been happening with increasing frequency as we change the rules to reflect beliefs in perfect markets. I would argue that economists, like doctors, have much to learn from pathology.We see more clearly in these unusual events how the economy really functions. 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. The economy would be efficient. We should be clear: this was not a theorem but a religious belief. The idea was always suspect…

Brad doesn't really state a position on all this, but explains the issue thusly:

There are, I think two lessons that can be drawn from big depressions. You can draw the Keynes lesson, which is also the Milton Friedman lesson, that if only you can stabilize the trend of aggregate demand (and compensate for externalities either through clever Pigovian taxes or ingenious Coaseian carving of property rights at the joints) then the competitive market system does absolutely fine. You can draw the Stiglitz lesson–which is that such a gross market failure in the large tells us that every single market everywhere in the world is probably riddled with smaller-scale market failures, and that comprehensive and detailed governmental structuring of institutions at every level–macro, mess, and micro–is necessary in order to properly promote the general welfare.

Krugman basically says he is still a disciple of the synthesis:

The brand of economics I use in my daily work – the brand that I still consider by far the most reasonable approach out there – was largely established by Paul Samuelson back in 1948, when he published the first edition of his classic textbook. It’s an approach that combines the grand tradition of microeconomics, with its emphasis on how the invisible hand leads to generally desirable outcomes, with Keynesian macroeconomics, which emphasizes the way the economy can develop magneto trouble, requiring policy intervention. In the Samuelsonian synthesis, one must count on the government to ensure more or less full employment; only once that can be taken as given do the usual virtues of free markets come to the fore.

It’s a deeply reasonable approach – but it’s also intellectually unstable. For it requires some strategic inconsistency in how you think about the economy. When you’re doing micro, you assume rational individuals and rapidly clearing markets; when you’re doing macro, frictions and ad hoc behavioral assumptions are essential.

....although with reservations:

I still think that the Keynes/Samuelson view is reasonable, although market imperfections loom larger in my mind than they used to. But these are not reasonable times …

Waldman tends to lean towards the Stiglitz position:

So why is the Keynes-Friedman-Samuelson position unstable ? I note that on the questions of public policy where they all agreed, 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.

Ok, with that background, what do I think of all of this?

I'm going to beg the question right up front and say, what the hell are we talking about here?  When we ask the question of whether markets are efficient, there is an implied goal:  are they efficient at doing what?  In other words, what do we want the marketplace to do?

Frankly, I'm not certain there is consensus even on this basic point, whether among economists or in society as a whole.

Personally, I would describe the purposes of any economic system as (i) to produce or acquire goods and services, and (ii) to distribute the goods and services produced or acquired in a fair and equitable manner.  At a minimum, the amount of goods and services produced should be sufficient ensure the survival of all members of the society. Ideally, the amount produced and the method of distribution should be sufficient to permit each member of society a minimum level of freedom.  Because a person who must struggle merely to survive is a person who is not free.

I'll have more to say about this topic....

We Are Becoming Brazil

Atrios links to this post about the 76ers new training facility:

Talk to Tom Knoche about the just-announced deal to move the NBA’s 76ers training facility from Philadelphia to Camden, and the Rutgers-Camden urban planning professor pointedly says: “What does this mean for the residents of Camden? Not much.”

In a city that was ranked the poorest in the country last year and where the unemployment rate is 16.6 percent (double that of New Jersey and far beyond the national average of 6.3 percent), New Jersey’s Economic Development Authority is going to spend $82 million in tax subsidies to build a state-of-the-art venue in a deal that will deliver approximately 250 jobs. With 200 of those positions already filled, the state is paying a whopping $1.6 million per new job created.

EDA states that its mission is to create “public/private partnerships to bridge financing gaps and to increase access to capital by the State’s business community with an emphasis on small and mid-size businesses and not-for-profit organizations.” But the 76ers are no small business — they are owned by billionaire Joshua Harris and, as the Inquirer noted, the 76ers’ development broker is Philip Norcross, brother of State Sen. Donald Norcross, a Democrat who represents Camden.

State Sen. Michael Doherty sharply critiqued the deal in an official statement, saying “the facility will essentially be a free gift from the hard-pressed taxpayers of New Jersey to Joshua Harris, the billionaire owner of the team … Local governments are being forced to cut to the bone … How can New Jersey not make this year’s full pension payment, but the state government can find an extra $82 million for a basketball practice facility?”

In Brazil, people are rioting in the streets over this sort of thing.

I have a feeling that people in the U.S. will be doing the same pretty soon if this sort of bullshit doesn't stop.

Wow! (UPDATED)

Eric Cantor Loses to Tea Party Primary Challenger.

Just...wow!

Update:  Just to add that I think Booman hits the nail on the head here:

There is literally no hope now that the Republican Party can do one thing to improve their performance with the Asian or Latino communities. In fact, since it is now evident that it is not sufficient to do nothing about immigration reform, but one must spend all day bellowing about the brown hordes crossing our border, Republican politicians are powerfully incentivized to loudly advertise their disgust with the changing demographics of the country. And they will. The GOP is guaranteed to do much worse with Asians and Latinos in 2016 than they did in 2008 or 2012.

Think about this. Wall Street and the Chamber of Commerce and Agribusiness and the evangelical community all lobbied the House Republicans to pass immigration reform and they got nowhere. That is how incredibly racist the people are in these gerrymandered districts. When has the Republican Party ever before told those powerful conservative interests to go fuck themselves? Normally, when those groups speak, the GOP jumps to do their bidding.

Eric Cantor didn't lift a finger to pass a comprehensive immigration bill and he was voted out anyway because he wasn't enough of a hard-ass on the issue.

The effect of Cantor losing will be more important than the causes of his defeat. Some will argue that immigration wasn't the only or even primary reason he lost. That won't matter for presidential politics, because Republicans will behave very counterproductively in response to Cantor's loss.

But it's true that these white, rural, conservative Christian voters have no reason to be happy with the Republican Establishment. The Republican Establishment has been a disaster on foreign policy. They have not brought back the lost manufacturing jobs. They have been losing the culture war. They haven't overturned Roe v. Wade or stopped the march of gay rights. They haven't stopped the dissolution of the nuclear family. They haven't prevented a prescription drug epidemic in their communities. They've been losing elections.

They have not been delivering in any tangible way.

Except on guns. Guns, guns, guns. Look where that's getting us by scanning the headlines over the past couple of weeks

The GOP ramps up the hatred of gays and blacks and Latinos and Muslims and "takers" and liberals and academics and teachers and journalists and scientists and urban-dwellers and secularists and...

...they oversee the biggest growth in wealth disparity in ninety years and offer nothing for jobs but tax breaks to corporations and the wealthy, and...

then they hand these aggrieved people guns, no questions asked.

Is it any wonder that every few days a new rivet pops and someone shoots up a school or a mall or Wal-Mart?

Non-Competes

Alex Tabarrok at Marginal Revolution has an interesting piece up about non-competes which talks about how they reduce innovation and so overall are bad for the economy.  It links to this New York Times article about how noncompetes are popping up everywhere.

Non-competes are proliferating everywhere.  I know a woman who works at a beauty salon - one of a chain of nearly 600 franchises nationwide - making $10 an hour plus tips in NYC.  She was made to sign a noncompete in order to get the job.  Frankly, this is bordering on the ridiculous.

I'd like to know whether this sort of thing is becoming more prevalent in other kinds of low-wage jobs.  It seems to me that if these clauses are enforceable employment becomes a sort of indentured servitude.

Noncompetes of this kind used to be unenforceable.  I don't know what the state of the law is lately, but I would find it shocking if the noncompete that my friend signed could actually be enforced.  But that's not really the point.  There is an in terrorem effect that these kinds of clauses have.  Most people like my friend wouldn't think twice about signing this because they need the job, but worry that if they leave their jobs they won't be allowed to work elsewhere.  Just the threat of enforcement is enough to keep employees in line.

Frankly, I'd like to see this sort of thing be outlawed.  Companies should not be allowed to insert clauses into contracts unless they are clearly enforceable.  If they do so they should be fined.

I'm back

So, I'm finally back.  I must admit that it's been difficult for me to find the time to keep up with this thing, but even more so, it's been difficult to keep motivated.  I don't know how other bloggers do it to be honest, at least if they do it on the side as I do.  In my defense, let me just say that my "real" job now is working as a writer of tax law treatises, and somehow after 9 or 10 hours a day (or, more recently, 12 to 14) of sitting in front of a computer, I find it difficult to motivate myself to spend another hour or two for blogging.

Anyway, a major deadline has just passed, and the intensity of my writing activity will start to diminish, and I hope to begin posting regularly here again.  Starting with this.  We'll see how long that lasts.

It's not as if there hasn't been a lot of interesting things to pique my interes over the last several months.  Just a few topics I've wandered across that I've been thinking a lot about.

1. At Crooked Timber over the last two weeks there's been a symposium on Joseph Carens' book, "The Ethics of Immigration/" Carens is a philosophy professor at the University of Toronto who has devoted his life to this topic - I take it this is his magnum opus. I haven't read the book yet (hopefully I will at some point), but if you read the posts you can gather a lot about what it's about. And the posts themselves contain a lot of interesting and provocative discussions. Immigration is a topic I have always been interested in -- one I have some strong views about (well, I have strong views about a lot of things...). I've been trying to wrap my mind about all I have read here and will be posting on it soon.
2. Ta-Nehisi Coates wrote quite a piece at the Atlantic last month called "The Case for Reparations," The headline is the real grabber: ">Two hundred fifty years of slavery. Ninety years of Jim Crow. Sixty years of separate but equal. Thirty-five years of racist housing policy. Until we reckon with our compounding moral debts, America will never be whole." I agree. I'm not sure that reparations are the answer, and I genuinely don't think that the sins of the fathers should have to be visited upon the sons. But people really should read this thing all the way through, and think about what needs to be done make this country one in which all people truly do have equal rights.
3. And, of course, Thomas Piketty's book and the reactions to it continue to fascinate. For me, the whole thing has a kind of resonance, because it raises an issue that I struggled with years ago when I was working as a Wall Street tax lawyer, during one of those reflective phases when I was questioning what the hell I was doing. I distinctly remember being troubled at the realization that the economy was growing at 3 or 4% a year, and my clients were making returns of 10-15% on their investments, and wondering how was this sustainable over the long run. Believe me, every deal I worked on in the 1990s, the projected returns were at least that high. I'm glad to see that more and more people are beginning to question how we can keep going like this.

There's more, lots more, that's caught my eye over the last several months.  Hopefully now I'll be able to share my thoughts on them more often.