Of all the comments I best liked the one by "Uncle Billy Cunctator" who wrote: "It would be nice if he [Stiglitz] described this new paradigm for us."
Too true. But when J-B Say and others arrived at "Supply creates its own demand" in the early 1800s most of the "supply" was food and consumer goods (mostly hand-made) constituted only a very small part of the average wage. The total supply of food was always mopped up by the population (or any excess bought to be fed to the pigs) while consumer goods were mopped up by the aristocracy and middle-classes. However, the consumer goods had to be conducive to purpose -- that is to satisfy one's class status (or aspirations).
Today (until recently anyway) food has been cheap and only a small part of general consumer spending. Until about 1980, of consumer goods (of which a large proportion are bought for status reasons only), there were always some for which there was still an unsatisfied demand by a sufficiently large component of the public. But since then we have had no uniquely new consumer goods, only enhancements of old ones. The chain of supply, which had been ever-changing, ever-enlarging, ever-improving all through the 1780-1980 era finally gave out. Increasingly, people could only be induced to continue buying up to the hilt by too easy access to credit -- indeed, thrust upon them. It was not "Supply creates its own demand" that broke down, but that the supply itself gave out.
There are still status goods, of course. But as Fred Hirsch pointed out 40 years ago the ones that remain (beautiful houses in beautiful surroundings, ocean-going yachts, access to the politically powerful, international travel, staying at 6-star hotels, personal coaching for one's children and access to the top universities, etc) are now, and always will be, in short supply. They are not available for mass consumption.
No, we don't need a new paradigm because Say's "Law" is not really a paradign but merely a statement about human nature.. We need new technologies by which we can exist in much smaller communities (as Sandwichman is hinting at) where status can be gained by personal worth and reputation, not by how many consumer goods one can accumulate.
Keith At 16:03 20/08/2010 -0400, you wrote:
Click on<http://feedproxy.google.com/~r/EconomistsView/~3/_qDSbjSUq2Q/stiglitz-needed-a-new-economic-paradigm.html>Stiglitz: Needed: a New Economic ParadigmTo get to the comments.From: [email protected] [mailto:[email protected]] On Behalf Of Michael GursteinSent: Friday, August 20, 2010 1:12 PM To: 'RE-DESIGNING WORK, INCOME DISTRIBUTION, EDUCATION'Subject: [Futurework] FW: [p2p-research] Stiglitz: Needed: a New Economic ParadigmNote the comments that follow... (and our very own "Sandwichman" is the first in the queue ;-)M -----Original Message-----From: [email protected] [mailto:[email protected]] On Behalf Of RyanSent: Friday, August 20, 2010 9:03 AM To: Peer-To-Peer Research List Subject: [p2p-research] Stiglitz: Needed: a New Economic Paradigm Sent to you by Ryan via Google Reader:<http://feedproxy.google.com/~r/EconomistsView/~3/_qDSbjSUq2Q/stiglitz-needed-a-new-economic-paradigm.html>Stiglitz: Needed: a New Economic Paradigmvia <http://economistsview.typepad.com/economistsview/>Economist's View by Mark Thoma on 19/08/10Joseph Stiglitz says adding bells and whistles to the current vintage of macroeconomic models will not fix what is wrong with them, "Nothing less than a paradigm shift will do":<http://www.ft.com/cms/s/0/d5108f90-abc2-11df-9f02-00144feabdc0.html>Needed: a new economic paradigm, by By Joseph Stiglitz, Comentary, Financial Times: The blame game continues over who is responsible for the worst recession since the Great Depression the financiers who did such a bad job of managing risk or the regulators who failed to stop them. But the economics profession bears more than a little culpability. It provided the models that gave comfort to regulators that markets could be self-regulated; that they were efficient and self-correcting. The efficient markets hypothesis ... ruled the day. Today, not only is our economy in a shambles but so too is the economic paradigm that predominated in the years before the crisis or at least it should be.It is hard for non-economists to understand how peculiar the predominant macroeconomic models were. Many assumed demand had to equal supply and that meant there could be no unemployment. (Right now a lot of people are just enjoying an extra dose of leisure; why they are unhappy is a matter for psychiatry, not economics.) Many used representative agent modelsall individuals were assumed to be identical, and this meant there could be no meaningful financial markets (who would be lending money to whom?). Information asymmetries, the cornerstone of modern economics, also had no place: they could arise only if individuals suffered from acute schizophrenia, an assumption incompatible with another of the favored assumptions, full rationality.Bad models lead to bad policy: central banks, for instance, focused on the small economic inefficiencies arising from inflation, to the exclusion of the far, far greater inefficiencies arising from dysfunctional financial markets and asset price bubbles. After all, their models said that financial markets were always efficient. Remarkably, standard macroeconomic models did not even incorporate adequate analyses of banks...: even a cursory look at the perverse incentives confronting banks and their managers would have predicted short-sighted behavior with excessive risk-taking. ...Fortunately, while much of the mainstream focused on these flawed models, numerous researchers were engaged in developing alternative approaches. ... With a few exceptions, most central banks paid little attention to systemic risk and the risks posed by credit interlinkages. Years before the crisis, a few researchers focused on these issues, including the possibility of the bankruptcy cascades that were to play out in such an important way in the crisis. This is an example of the importance of modeling carefully complex interactions among economic agents (households, companies, banks) interactions that cannot be studied in models in which everyone is assumed to be the same. Even the sacrosanct assumption of rationality has been attacked: there are systemic deviations from rationality and consequences for macroeconomic behavior that need to be explored.Changing paradigms is not easy. Too many have invested too much in the wrong models. Like the Ptolemaic attempts to preserve earth-centric views of the universe, there will be heroic efforts to add complexities and refinements to the standard paradigm. The resulting models will be an improvement and policies based on them may do better, but they too are likely to fail. Nothing less than a paradigm shift will do.But a new paradigm, I believe, is within our grasp... What is at stake, of course, is more than just the credibility of the economics profession or that of the policymakers who rely on their ideas: it is the stability and prosperity of our economies.58b70f.jpg Things you can do from here:* <http://www.google.com/reader/view/feed%2Fhttp%3A%2F%2Feconomistsview.typepad.com%2Feconomistsview%2Fatom.xml?source=email>Subscribe to Economist's View using Google Reader * <http://www.google.com/reader/?source=email>Get started using Google Reader to easily keep up with all your favourite sites_______________________________________________ Futurework mailing list [email protected] https://lists.uwaterloo.ca/mailman/listinfo/futurework
Keith Hudson, Saltford, England
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