Thomas Palley — Looking for flimflam: some hints on where to find it

Palley repeats the usual criticism of New Keynesianism, which New Keynesians brush off.

Then he attacks assumption of Pareto optimality. According to Wikipedia,

Pareto efficiency is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources: it makes no statement about equality, or the overall well-being of a society.

If it were known at the time, Pareto optimality would have used to defend the ownership of human capital in the debate that culminated in the US Civil War and Emancipation Proclamation. This has been estimated to be the largest destruction of capital that occurred simultaneously until that time.  The agricultural economy of the South was devastated and along with the culture,  making some much worse off by making others better off. Economically it was a disaster; ethically, socially and politically, it was the right thing to do. While contemporary inequality does not rise to that level of inequity and iniquity, it is a similarly significant, indeed  serious, issue ethically, socially and politically, and, it can be argued, also economically.

Now to the big enchilada which I did not mention in my post because it would have confused an already difficult subject matter. Absent imperfect competition, price and nominal wage rigidity, and other market failures, the so-called new Keynesian model delivers Pareto optimal outcomes. In my view, the notion of making Pareto optimality the benchmark for describing and discussing capitalist economies is silly. Yet from the moment one enters an economics classroom that is the frame through which theoretical thinking is forced. The economist who tries to offer another theoretical frame and stands in the way of that juggernaut will be excommunicated by the mainstream.

 Touché.

Looking for flimflam: some hints on where to find it
Thomas Palley