Summers and Stansbury only get it half right

4 Sep, 2019 at 18:48 | Posted in Economics | 5 Comments

The new Keynesian school emerged from the synthesis, propelled by the invention of a slew of frictions and rigidities – staggered contract negotiations perturbing labor markets, “menu costs” of changing prices and wages, prices locked into inefficient levels by contracts, probabilistic price revision, monopsony power of firms in labor markets, on and on. In the process, any and all discussion of effective demand was submerged.

newThe new Keynesian inventors are now the ruling elders of macroeconomics, unlikely to change their minds. So much for Keynes for now, but Summers and Stansbury might remember with Max Planck that science advances one funeral at a time. They are certainly correct in saying that “the role of particular frictions and rigidities in underpinning economic fluctuations should be de-emphasized relative to a more fundamental lack of aggregate demand.” Convincing their peers is far more easily said than done …

Summers and Stansbury, to their credit, point to fundamental contradictions that central bankers confront. They cannot control inflation in a world of conflicting claims. The bankers’ chosen instrument, the interest rate, has little macroeconomic traction. How institutions largely determine output, employment, and inflation is beyond their ken. Demand drives output and prices, but it is not clear that the fiscal expansion Summers and Stansbury propose will boost inflation under existing labor market institutions. It is possible that both wage equality and inflation could rise if economic expansion combined with supportive regulation boosts workers’ bargaining power in the labor market.

Lance Taylor / INET


  1. “Snea figurer som styr vår värld” som styr vår värld,som, Peps sjung för länge sen!

  2. The best way to boost workers’ bargaining power is to give them a basic income so they can quit bad jobs and still have a decent income.

    • The rub is a BI flows straight up to Capital, which IMO has decadal socioeconomic preferences built in with regard to wage suppression [and other worker rights] – see below.

      Think Temple Grandin.

      • Temple Grandin is not a good example to me. She is a tool of Big Meat.
        Basic income is replenished every month (or quicker if necessary to maintain real purchasing power in cases of hyperinflation), so it establishes a floor on access to resources that Capital can’t take away.

  3. “Sometimes I believe in as many as six impossible things before breakfast,” said Alice in Wonderland. She might have been a macro-economist.
    With no disrepect intended to Lance Taylor, Summers and Stansbury, or for what it is worth, Pigou or Keynes, I cannot help but think how hopeless of resolution is a dispute over terms, where the terms cannot either be defined nor made to refer to some observable object or phenomenon.
    “Price level” — does no economist consider how impossible a concept that must be?
    the interest rate” — there is only one? really?
    “monopsony power of firms in labor markets” — this awkward construction is how economists refer to the customary use of take-it-or-leave-terms (possibly entailing “an efficiency wage”, another obscure term) in employment relations.
    “macroeconomic problems [are] a reflection of frictions that slow convergence to a classical market-clearing equilibrium” (quoting Samuelson and Stansbury characterizing New Keynesian thinking). — very few products are offered on market-clearing terms so macroeconomists think this justifies asserting that the economy as a whole behaves as if it is seeking a market-clearing price level!
    natural rate of unemployment interest” — the economy is almost entirely artifactual — very little about it is “natural”
    I stared at this sentence from Lance Taylor: “price increases are controlled by business while the money wage is subject to bargaining between business and labor.” I am sure he intended some meaning relevant to his argument, but when did he leave the plane of reality behind? Wages are as administratively controlled as any price of an item in a supermarket; and, consumers are “bargaining” at the supermarket just as much or more than employees at work. It does not help to construct arguments in this sloppy way.
    These arguments over terms are hopeless as long as no one has a grasp on the underlying ontology of the economy as something both real and institutionalized in ways that have to be respected when we attempt to think about it. Do not say, “market economy” when the institutions of exchange are obviously not markets in any meaningful sense. Do not say “market-clearing equilibrium” unless you can point to its existence in the circumstances.
    “Aggregate demand” if it means anything means money-financed demand. So look to money, not to artificially created “real” parameters for the variables of strategic choice behavior. The creation of debt might have something to do with changes in aggregate demand. Hello? Secular stagnation, my ass.

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