The New Debate
Edited by Tyler Cowen and Eric Crampton
Chapter 3: Keynesian economics and critique of first fundamental theorem of welfare economics
3. Keynesian economics and critique of first fundamental theorem of welfare economics Joseph E. Stiglitz KEYNESIAN ECONOMICS Of all the market failures the one whose impact in eroding public confidence in market processes was the greatest was the Great Depression, the worst example of the periodic slumps that had plagued market economies throughout the centuries of capitalism. The existence and persistence of unemployment can be viewed as providing a convincing refutation of the neoclassical model: for in that model, all markets, including the market for labor, clear. Curiously the debate on market socialism did not focus on the relative macroeconomic merits of the alternative systems, and the historical evidence is of limited value. Though the socialist economies ÔsolvedÕ the unemployment problem, their solution may have been to make it disguised rather than open. The socialist economies did not seem to exhibit fluctuations in growth rates, evidence of fluctuations in economic activity. Still there are theoretical reasons to think that market socialism would alleviate the underlying problem. One of the central themes in recent macroeconomic work has traced economic slumps to Ôcoordination failures.Õ To put the matter baldly, there are no jobs because there is no demand for the output of firms, and there is no demand for the output of firms because people do not have jobs. If the economy was well described by the ArrowÐDebreu model, if there were, for instance, a complete set of markets, then these coordination failures presumably would not occur. Advocates of market socialism...
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.