Friday, October 11, 2013

Challenge Accepted?

My good friend and mentor Bryan Caplan issues a challenge for "anti-Keynesians" in which he predicts three belief outcomes of reading "Truman Bewley's Why Wages Don't Fall During a Recession from cover to cover."

1. Nominal wage rigidity plays a large role in the modern U.S. economy.
2. A substantial fraction of this nominal wage rigidity stems from basic human psychology, not government regulation.
3. Nominal wage rigidity is sufficiently durable to create a long-run inflation-unemployment trade-off at low inflation rates.

I was a bit puzzled at this. I don't consider myself an anti-Keynesian (a Keynesian skeptic is probably closer to the mark), but labor price rigidity has nothing to do with my skittishness. Instead, I balk more at the implications of filtering what might be an analytically useful framework through the mulch of partisan politics.

But then, this is hardly unique to Keynesian macro. Any research programme that ignores the uncomfortable truths of public choice is likely to cause one and only one of my eyebrows to arch skyward. Even if I were willing to grant that politicians are economically literate, it is impossible for them to act as if they were, given the balderdash believed by their constituents. Elected officials owe precisely no fealty to the authors of brilliant theory. Even the authors themselves occasionally (perhaps often) recognize this.
In any industry, where there is reason to believe that the free play of self-interest will cause an amount of resources to be invested different from the amount that is required in the best interest of the national dividend, there is a prima facie case for public intervention. The case, however, cannot become more than a prima facie one, until we have considered the qualifications, which governmental agencies may be expected to possess for intervening advantageously. It is not sufficient to contrast the imperfect adjustments of unfettered private enterprise with the best adjustment that economists in their studies can imagine. For we cannot expect that any public authority will attain, or will even whole-heartedly seek, that ideal. Such authorities are liable alike to ignorance, to sectional pressure and to personal corruption by private interest. A loud-voiced part of their constituents, if organised for votes, may easily outweigh the whole.
-Arthur Cecil Pigou. (source)

 It seems to me as if Pigou's arguments apply equally well to questions of handling labor price frictions, particularly when what's under discussion is bilateral bargaining, with possibly truculent agents on both sides of the negotiating table.

Pedestrian morality, even when sprouting from the ideas of defunct economists (both when they are right and when they are wrong) is routed through institutions to yield policy. I can't speak for why other folks might oppose the Keynesian project, but for me it's a matter of yielding common sense political economy to common moral urges. Any economic analysis that champions war as economic balm strikes me as deeply perverted.

Then again, I'm strongly inclined to think of philosophy, politics, and economics as three prongs on the same trident. Maybe that's a mistake. Maybe the proper level of analysis is simply the economics in isolation. If that's the case, Bryan's challenge is not for me.

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Do you have suggestions on where we could find more examples of this phenomenon?

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