Brad DeLong — A Few Scattered and Preliminary Notes on Comparative Economic Theology

Brad DeLong takes up from where Lars Syll's quote of Joseph Stiglitz about market "theology" leaves off, pointing out that Keynes asserted neoclassical principles apply when an economy is at full employment.

JMK: Our criticism of the accepted classical theory of economics has consisted… in pointing out that its tacit assumptions are seldom or never satisfied…. But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment… the classical theory comes into its own again… then there is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed… there is no objection to be raised against the modern classical theory as to the degree of consilience between private and public advantage in conditions of perfect and imperfect competition respectively… there is no more reason to socialise economic life than there was before....

Brad DeLong observes that the universe of economic discourse has shifted since then.

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…

The way to revise Say is to dump the money as neutral (veil over barter) assumption and recognize the operational realities of a modern monetary production economy, as Keynes had initially proposed in addressing Say's Law.

The operative principle is effective demand as Keynes pointed out, not supply. If effective demand is dynamically stable at full employment, then investment will be forthcoming to supply it by expanding production, thereby maintaining full employment with price stability while the economy growth, e.g., with population growth.

Say's Law assumes that holding money has no utility. Keynes observed that this is false due to uncertainty that impels people to make monetary provision through saving. Unless one sector's saving is offset by another to maintain a full employment budget, e.g., through a fiscal deficit, then effective demand at full employment will decline, all goods produced will not be sold, the economy will contract, and unemployment rise. Similarly, if  there is excess demand from dissaving sparking demand side inflation, this would have to be offset by another sector's saving, e.g., government raising taxes.

The reason that Say's Law (based on barter) doesn't work in practice at full employment is that monetary saving by sector is also variable at full employment. MMT explains how to address this. Surely, Brad DeLong knows this.

The additional "technocratic" fix —  I would cal it "institutional" — that is needed is economic policy that offsets the distributional effects inherent in market capitalism resulting in asymmetries that have social and political implications as well as economic.

Capitalism favors productive capital formation and therefore wealth formation as well, both as a funding source and also as a desired outcome. Since the neoclassical assumptions of perfect markets, perfect foresight, etc.,  do not apply to the real world, even of commerce, distributional will not necessarily follow the model, and experience shows that in modern production economies it doesn't. The assumption that distribution is based on marginal productivity is ideological so that everyone receives just deserts in a meritocracy and so Pareto optimality prevails applies only in the model when institutional factors are taken into consideration that result in asymmetric power and the ability to extract rents.

Social, political, and economic factors affect distribution by generating asymmetric power that results in privilege, rents, and maldistribution. Assuming that this is solely or chiefly the result of government intrusion is an ideological belief with no historical support. And assuming that the  ideal conditions of the neoclassical model can be achieved in the real world by reducing the role of government is absurd for institutional reasons.

 Just as law is necessary for commerce, so too, policy is needed to address the asymmetry endemic in capitalism, as well consequent distributional disparities arising from asymmetries such as the disparity between owner share and worker share. Moreover, the issue is not simply economic but social and political, such as the tension between representative democracy and the power and privilege.

These questions cannot be solved by economic modeling. They are larger questions that economics can inform in some ways but in all ways. Different societies decide distributional issues not only on economic grounds but also moral ones, in addition to taking social and political factors into account.

Adolf Lowe got it right. Figure out what kind of society is desired and then design it. Policy is a matter of preference in a democracy while implementing it is essentially an engineering design problem.

Assuming that rational pursuit of maximize utility in a "free market" will necessarily lead to the greatest good for the greatest number is purely ideological, and the ideology is biased toward the ownership class.

It's not a choice between market fundamentalism and another technocratic layer of government intrusion as much as pitching an unreasonable methodological individualism regarding choice‚ which is the sacred cow of conventional economics‚ and acknowledging the role of culture and institutions in a liberal democracy in which economics is merely one factor among many to be taken into consideration in harmonizing the trifecta of liberty, egality, and community. There is no one size fits all solution. A good society is always a work in progress.

WCEG — The Equitablog
A Few Scattered and Preliminary Notes on Comparative Economic Theology
Brad DeLong
(h/t Jan in the comments)