Arnold Kling

Solow on Keynes

Arnold Kling, Great Questions of Economics
Previous Entry Next Entry

Nobel laureate Robert Solow argues that market imperfections should not be assumed away.

There are asymmetries of information...There are substantial elements of monopoly in the modern world...And there are inflexibilities, rigidities in the price and wage mechanism.

I think it's foolish to think that these are imperfections you could hope in time to get rid of. I think those rigidities in wages and prices correspond to needs that social institutions are trying to meet

[note: my Ph.D dissertation, which Solow supervised, was entitled "Imperfect Information and Price Rigidity."]

On the theory that there is a "natural rate" of unemployment, Solow says,

It seems to me that what the profession [ends up saying is that] If the rate of inflation is increasing, then the current unemployment rate must be less than the natural rate of unemployment. If the current rate of inflation is decreasing, then the current unemployment rate must be above the natural unemployment rate. But that, of course, is a way of saying exactly nothing.

Discussion Question. Solow suggests that the Federal Budget process is too time-consuming to be used for macroeconomic stabilization. Therefore, he argues that automatic stabilizers ought to be strengthened. What sorts of tax or spending programs help counter the business cycle?

Return to top