Abstract
C. West Churchman, in The Systems Approach and its Enemies, has challenged systems theorists to extend their reach beyond hard, mathematically-oriented techniques to include (and surpass) politics, morality, religion, and aesthetics. We present here an instance of Churchman’s argument using as an object lesson the failure of academic economists correctly to predict and explain the behavior of the US economy under different policies. A model devised by Glenn E. Burress makes correct predictions and explains the current behavior of the economy that has seemed anomalous to Keynesian economists. We explain why this model demonstrates a three-phase relationship between unemployment and changes in price level. This model is contrasted with the assumptions conventionally made and is shown to be elegantly explanatory. We then must ask why the Burress model has been ignored. We find that economists (generally) have followed mathematical rather than scientific paradigms and that policy- makers have made assumptions based on private values rather than public morality. We conclude that the system must comprehend political and moral dimensions if it is to serve the systems scientists’ client, our society. The paper closes with a brief personal memoir connecting Glenn Burress to the late A.W.H. Phillips.
Keywords: economic policy, scientific method, political influence
1. Introduction
Having spent a professional lifetime working on mathematical models, on hard systems, C. West Churchman wrapped up his career with a book that called for a more comprehensive and humanistic outlook in dealing with systems. (Churchman, C.W., 1973) He regarded the rivals, or enemies, of the systems approach to be politics, morality, religion and aesthetics. Each of the enemies had a claim on social decision-makers’ thinking, but none had a superior justification for its respective paradigms. If systems scientists were to be effective, Churchman argued (as I see it) they would have to understand and absorb the claims of the enemies of systems science. Among other things, there needs to be a place in a larger systems approach for instinct, serendipity, unjustified insights (as he embodied, e.g., in the I Ching and Jungian archetypes), and unjustifiable values. The appeal is rather abstract and deserves substantiation by concrete examples. I have chosen to put forward an example that is both socially important and of immediate interest.
The worlds of government and business have been watching with fascination for several years as Alan Greenspan, Chairman of the Federal Reserve Board, has lowered interest rates and reduced unemployment while simultaneously reducing the inflation rate. Conventional beliefs would have it otherwise, and the Fed has proceeded slowly and cautiously but without any apparent theoretical basis for how far the policy of reducing unemployment can be pushed. Yet a model that predicts this behavior of the economy has been available for some three decades. It just has not been adopted in the institutions that make national economic decisions except for brief periods in the Kennedy, Johnson, and Ford administration, when it was successful. This paper will lay out roughly the two models -- the conventional and the innovative one -- and then ask the question, “Why has the wrong model been so persistent?”
2. Two Models
2.1 The Pieces
One way of thinking about models is as relationships among elementary concepts. Obviously, this is not the place for a rigorous text on economics, but to orient the subsequent discussion, we can name heuristically some of the concepts with which the two models deal. Unemployment is the percent of available workers who cannot find jobs. Natural rate of unemployment (also called nonaccelerating inflation rate of unemployment or NAIRU) is a hypothetical rate of unemployment at which all who are ready to work are employed but below which bidding for workers by employers would tend to raise the inflation rate. Change in price level is measured by the difference in the average price of some representative bundle of goods (and services) over some specified interval of time. Productivity is measured by the real gross domestic product per hour of work by labor.
There are also some non-economic concepts that are relevant from the systems point of view. Mathematics (except at the deepest level) is the manipulation of symbols (and includes, for our purposes, formal logic although some might shift the nomenclature to reverse the inclusion relationship). Science is the reduction of some external reality to mathematical or linguistic terms. A system potentially may include everything; the boundaries may be fixed by the investigator in order to make a model amenable to explication, but the true boundaries are to be discovered empirically and may not, in fact, be closed. In general, systems are not static or closed; they evolve and contain networks of relationships with feedback that makes system behavior unpredictable by simple cause-and-effect analysis.
2.2 The Economists’ Model
In an attempt to make order of the chaos of observation, economists have adopted an elementary mathematical paradigm, the logic of geometry. One postulates certain “self evident” truths and reasons from them to consequences. The criterion for acceptability of a model under this regime is whether it is internally consistent with the rules of logic, but that is a tautologous test. The mathematical paradigm may be contrasted with the scientific paradigm, to be described in the next section, The Scientists’ Model. Economists do look at real-world data when they try to discover “self-evident truths,” but too often they lose sight of what the real world is telling them for the sake of getting on with putting a manageable model on paper. Since consistency rather than reality is the criterion, there is seldom attention given to refutation and revision.
Here we shall instantiate this conclusion with the example of the Phillips Curve (2). Incidental to his study of methods for stabilizing business cycles and other economic fluctuations, A.W.H. Phillips (1958) studied the historical record of prices and unemployment in Britain from 1861 to 1957 to try to tease out the relationship empirically. According to Leeson (1997), and consistent with my own knowledge, Phillips did not place much faith in his curve. It was developed as a casual investigation on the occasion of a particular conference; his interest was in the stabilization of the business cycle by dynamic control techniques, as proposed by Tustin (1953). Phillips believed that a naive application of his empirical data would actually be destabilizing. Nevertheless, Phillips’ curve was seized upon by economists, policy-makers, and politicians with their own agendas and took on a life of its own. Phillips did no more than call attention to the importance of the unemployment-inflation relationship. Here was Churchman’s enemy, politics, distorting the message.
A brief, accessible comment on the Phillips Curve came from Martin Gardner (1981) in his final “Mathematical Games” column in Scientific American. The main theme was a criticism of the “Laffer Curve”, a presumed relationship between tax rates and amount of taxes collected that had been used as technical “justification” for the Reagan program (Reaganomics). In passing, Gardner characterized the Phillips Curve, also, as being a function without any well-defined meaning, an arbitrary tangle of lines in a subtly humorous diagram. In this, Gardner was correct; Phillips had been merely starting an investigation with a retrospective historical study; he had not provided an analytical model. Gardner’s point was made in a more dignified manner in Economic Trends, December 1994, p. 5. published by the Federal Reserve Bank of Cleveland. There is shown in a series of four scatter charts that “[i]n the long run..., there is no apparent relationship between inflation and unemployment.” In the next section, I shall suggest that this statement is not correct and is based on a misconception of the nature of scientific theories.
Politics distorted Phillips’ work in another way, not the politics of public policy but the politics of the discipline, the difficulty in overcoming the limitations of the mind sets and models of authorities. Instead of exploring the limitations and applicability of intellectual models, instead of seeking refutation of theories, often they are transformed into postulates or even dogmas (3). As an engineer, Phillips was aware that an economic system is dynamic, with feedback loops and behaviors that were not susceptible to simple cause and effect. analysis and that the static models of the economist were not the appropriate ones to explain macroeconomic phenomena. He knew that static analyses, descriptions of equilibria, linear equations, are inadequate to describe the behavior of the economy. He built an hydraulic model [Barr, Nicholas (1988)] not in the expectation of making economic predictions but as a didactic tool to demonstrate to policy-makers how their decisions often had counter-intuitive or counterproductive results after the consequences worked their way through the dynamic system. The demonstration interested a few economists, but they did not see their way to adapting the engineering techniques, proposed by Tustin (1953), to economic decision-making. These techniques came from outside their discipline, were exotic, and required a scientific rather than mathematical orientation. With respect to the Phillips curve itself, it ts worth noting the report [Leeson, Robert (1997b)] that the proposition that there was a trade-off between inflation and unemployment “was not the view of A.W.H. Phillips, nor was it the view of J.M. Keynes.”
2.2 The Scientists’ Model
In the last section, I stated that the conclusion of the Federal Reserve Bank of Cleveland that “there is no apparent relationship between inflation and unemployment” is wrong. A true statement would be that scatter plots do not reveal the relationship. Observation, classification and compilation of data are the beginning of science, but they do not constitute science. What is missing is a model or theory that relates the data, leads to reliable predictions within the domain of the theory, and is capable of being tested and refuted. [Popper, Karl R. (1959)] In this case, the scatter plots fail because they do not describe the dynamic system that an economy really is. The data underlying the plot are annual observations of inflation and unemployment, but those parameters do not relate on so coarse-grained a time scale. The data do not consult a calendar but respond to larger economic, social, psychological, and political factors.
There is also an implicit assumption that the relationship is described by curves with negative slopes; probably this assumption stems from over-immersion in the microeconomic marketplace model in which increased demand (for labor) is supposed to elicit a higher price (wage rates). The supply-curve assumption completely omits consideration of the effects of enhanced productivity induced by spreading of fixed costs. In fact, simple microeconomic theory is just not generally applicable to macroeconomic relationships. The two theories are as disjoint as the theory of the gambler in placing his bets (micro) and that of the casino in assuring that it makes a profit (macro). The mathematical approach is agnostic with respect to reality. Mathematics is merely a language, and if that language can be used to serve an ideological end, if it satisfies its own rules of consistency, it will often be so used. Science, of course, also uses the language of mathematics, but it is a game of empirical tests, not of tautological consistency.
The model described in the next section is part of a larger enterprise conducted by Glenn E. Burress for many years. Its origins are in the observation that there are eras in economic history – notably the 1920s, the Korean war period, and following the Kennedy tax cut – when nearly full employment was accompanied by low inflation and even deflationary prosperity. The model is not only internally coherent but also confirmed empirically. Its latest confirmation has been the performance of the U.S. economy under the Greenspan policy of lowering unemployment while lowering interest rates.
3. The Burress Curve
3.1 The Description
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Words, equations, diagrams are all metaphors for some “reality” for the purpose of conveying understanding from one mind to another. As metaphors, they represent reality but are not the reality they represent. A metaphor that conveys a precision beyond what is known to be real misrepresents reality. The Burress curve shown in Figure 1 does not purport to convey a precise relationship but does fairly represent the underlying structure of the economy. The numbers represent rough estimates of NAIRU (2%) and a point at which social perceptions about the state of the economy change (10%). Over extended periods, the curve may be plastic – depending on the historical, ideological, and legal environments – but the general shape is stable and of great significance. The axes are deliberately not scaled (4).
The Phillips Curve is usually assumed to have a negative slope, probably as an axiom based on the analogy of the microeconomic model of the supply curve; i.e., the more a factor (labor, in this case) is demanded, the higher the price it can command. But the rules of a microeconomic market based upon atomic participants do not apply to macroeconomic systems with feedback, in this case arising from the dual role of labor as both producers and consumers. We must now explain why the curve has the shape shown with a positive slope in its middle portion. The Burress Curve reverses slope at two points, C and B. Point C represents unemployment at the NAIRU level, given here as about 2% but a matter to be studied empirically. To the left of C, the economy is overheated, there are shortages of ordinary workers, and bidding up of wage rates as employers compete for labor. Limits of production have been reached and prices of goods are raised as a fully-employed population uses its high wages to bid up the prices of consumer goods. The part of the curve to the right of point B represents depression conditions. Double-digit unemployment prevails; the future looks bleak so that consumer borrowing is curtailed. Even the employed feel insecure and restrict their consumption of goods. There is excess productive capacity, so investment in capital goods is curtailed. Prices decline as inventories do not move and have to be sold at distress values. It is the economic scenario of the 1930s in which the private sector stagnates and only the government has the power and the incentive to make real investments. As we move upward on the curve between C and B, we have conditions of “stagflation” as prevailed around 1980. There are both increasing unemployment and increasing prices as the economy slows down driven by restrictive monetary or fiscal policies. Both the left and right extremes of the curve have been within the experiences of this century and have represented disasters. The normal – and therefore most interesting – part of the curve is at the center where the slope is positive.
As unemployment is reduced on the path between B and C, general wages cannot be increased because there remain the unwilling unemployed available to take on jobs. Of course, as C is approached there may be some special trades and skills that may exhibit shortages and local bidding up of some wages, but on the whole the economy has idle hands available at stable wages. Increase in system productivity, explained immediately below, permits some increases in wage rates without inflation in the central range of the curve.
Why, then, does upward pressure on prices diminish as the economy moves down the B-C slope even as the economy warms up? The explanation lies in the increase in system productivity (to be distinguished from firm productivity and capital productivity) brought about by positive feedback through the relationship of fixed and variable costs. Consider here the way in which individual firms experience their costs and their profits by consulting Figure 2.
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A firm will stay in business in the long run only if its revenues at least equal its fixed and variable costs. The fixed costs are those that it will incur regardless of the amount of goods it produces, such things as carrying of debt, payment of rent and property taxes, accounting and legal fees, and other things that it must do simply to be in existence. The firm has some long-run control of these costs but in the short-run (a year or two) they cannot change. The variable costs are those that change with the amount of product produced; mainly labor and materials consumed in manufacture but also costs related to number of customers and other factors that depend upon the intensity of the firm’s activity. As business picks up, as production and sales are increased, the proportion of the fixed costs that must be recovered in each unit of product declines. That is, as more items are produced, the less does each item have to bear of the fixed costs. The calculations of each firm will be unique to its own circumstances, its prior investment in plant, its local labor supply, its market and its competition, but the general interest of businesses is to operate close to full capacity and to have an active economy with as many people employed as are able to work. It is the Henry Ford principle of paying workers enough to purchase the products.
Moving down the slope to C is objectively a good thing as more goods (which may include services, public facilities, and quality-of-life goods) are produced and consumed, but one does not want to pass to the left of C. Nor does want to move far to the right of C, putting people out of work, increasing unit costs, and discouraging investment. Can we maintain the economy close to C? The technical means were suggested by Tustin (1953).
3.2 The Empirical Evidence
The point has been made that the proper test of an explanatory model is not its consistency with assumptions but how well it represents reality. Is the model a reliable predictor of actual performance? Burress tested his curve by examining contrasting eras in monetary and fiscal policies and observing the measured consequences of those policies. He called the alternative paradigms “scientific” and “economic theory,” characterized them by their assumptions about the nature of economic problems, and tabulated the performance of the economy under the application of the respective regimes. His findings, since refined, were presented to Congress in 1975 and reported in “A New Approach to Forecasting...” in The 1975 Economic Report of the President: Hearings before the Joint Economic Committee, US Congress Part IV, pp. 1017-1052. The periods were identified, variously, by explicit declarations, implicit observation of operative policies, and (on occasion) by off-the-record knowledge in Burress’ capacity as a journalist.
The results of these tests are summarized in Table. 1.
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Scientific Paradigm: The premise is
that the primary causes of economic (and social) problems are poverty and high
unemployment rates and that the remedy is to reduce both to increase
productivity and lower inflation. |
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Economics
Paradigm: The premise is that economic problems arise from inflation
caused by low unemployment and poverty rates. The remedy is to increase
unemployment and poverty. |
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| Period Start | Policy | Indicators
[Unemployment, and/or Inflation, Interest Rates, Poverty, Racial and Income Inequality] |
GDP
[Average Annual Change in Real GDP (%)] |
Productivity
[Average Annual Change in Productivity (%)] |
Budget
[Federal Budget Balance (except 1941-5)] |
| 07/01/21 | Sci |  |
5.59% | 2.42% | Surplus |
| 07/01/29 | Econ |  |
0.93% | 2.18% | Deficits |
| 07/01/40 | Sci |
|
6.19% | 4.16% | Surplus |
| 07/01/56 | Econ | |
2.32% | 2.87% | Deficits |
| 07/01/60 | Sci | |
4.79% | 4.20% | FY'65 Surplus |
| 07/01/65 | Econ | |
2.99% | 1.91% | Deficits |
| 04/01/75 | Sci | |
5.47% | 11.52% | Def. Cut 50% |
| 07/01/76 | Econ | |
1.94% | 0.18% | Deficits |
| 07/01/82 | Econ* | |
4.15% | 2.04% | Deficits |
| 07/01/87 | Econ | |
1.13% | 0.75% | Deficits |
| 07/01/90-'98 | Sci** | |
4.21% | 1.54% | Declining deficits |
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The application of the Burress model to actual policy is also immediately relevant. As this paper is written (July 1999) the Federal Reserve Bank has just signaled a bit of restraint by raising the Federal Funds Rate by .25% and then mitigated the move by announcing that it does not plan further increases. The Chairman, Alan Greenspan, has also stated that the present good economy, with both unemployment and inflation declining, is “unprecedented”. That is a very troubling statement. Burress’ model and the historical record show that, on the contrary, such behavior is both historically consistent and theoretically expected. Greenspan should be commended for defying prior assumptions and lowering unemployment, but his ahistorical claim of exceptionalism, his lack of a model for the behavior of the economy leave policy-making subject to whim, black magic, and political pressures. The Burress model forms the basis for focusing attention and research on point C and the conditions for maintaining full employment.
3.3 The Implications
3.3.1 Getting to and Staying at Point C
The Burress Curve is not a dynamic representation. That is, time has no part in the image. In physics, such a curve would be called a phase diagram. One may look back at history and mark on the curve the dates at which the conditions of unemployment and inflation prevailed, but the curve does not indicate how one moves from one point to another or how long it might take to travel between points. The great lesson of the curve is that for the usual range of operation the slope is positive, not negative as usually assumed. Knowing where one is on the curve and where one wants to go is only the beginning of policy-determination
The mathematics of systems with feed back is well known to electrical engineers, but it is esoteric and not amenable to explanation here. What is at stake, the health and happiness of millions, however, makes it a moral imperative that we develop institutions that can cope with whatever mathematics or other techniques that optimize economic performance. It would be unconscionable if our techniques were limited to those that are traditionally taught to economists simply because they are simpler. If policy-makers would look at the evidence of history in the light of Burress’ phase diagram, if they would accept the correct slope of the curve, we already have the institutional structure to arrive at C, as the evidence of the Greenspan regime indicates.
Achieving a point-C economy and holding it near there is likely to have widespread beneficial social effects. Full employment creates its own optimism and confidence. Optimism encourages real investment in capital goods (including education) and infrastructure. Investment increases labor productivity permitting both lower prices and higher profits to those providing the investment capital. The “rising tide lifts all boats” principle would make the repair of social inequities easier. It is a vision worth pursuing.
3.3.2 The Political Obstacles
While the technical details of system control are complex, the qualitative lesson is straightforward. Stability depends on timing; corrective action must be taken in small timely steps. It will not do to delay action and try it make up for the delay by stronger actions. As applied to economic policy, that is the key teaching of Tustin (1953). But here we run into the enemy, politics, again. There are advantages to be gained by people or institutions located at key points in the political structure that can accrue from not operating the economy at an optimum point. The classical expression of this behavior is in the sociology of social class. Familiar examples lie in the tensions between capital and labor or between managers and shareholders. Were there a common commitment to getting the best for all, there would be more than enough for all and an opportunity to enjoy the pleasures of the arts and the satisfactions of passing a better world to our descendants. Hardin’s (1968) tragedy of the commons and Soros’ (1998) critique of uncontrolled markets speak to the justifications and the limitations of ideological individualism. A politics based on such an ideology does not easily yield institutions devoted to the common good. Indeed, ideological dichotomizing, demanding binary choices, is inconsistent with the subtle existential compromises demanded by reality [Rubin (1998)].
To optimize the dynamic behavior of the economy we would have to transfer certain key short-term decisions from the political judgments of legislatures, commissions, and executive departments to technicians. The prompt but small adjustments in monetary and fiscal policies, the management of the timing of private and public investments. It is difficult to imagine a scenario in which a legislature would yield its control of economic destiny to a stabilization formula prescribed by engineers and statisticians. Most political debate is conducted under a paradigm of binary choice between ideologies – socialism - bad, free enterprise - good – where optimization requires a nuanced, circumstantial combination. It could be a goal for systems scientists to absorb and reform politics.
3.3.3 Moral Issues
Churchman’s second “enemy” is morality. There is, of course, a vast, ancient literature about ethical questions. In modern times, there have been works that have tried to rationalize and systematize ethical issues and bring them into the realm of systems principles.. A good entry point to that literature is The Evolution of Cooperation, Axelrod (1984) which sets up a model in which each of the actors is selfish but is compelled to cooperate because of a particular structure of rewards and punishments coupled with a rule that prevents any player from “picking up his chips” and leaving the game at will. The model is crude but informative of why we need police and courts in the “real world.” If we are to avoid invoking such crude and expensive institutions, we have to internalize individually the rules and their reasons. The choice is ours; either we act with understanding of the necessities or we can expect to be compelled by others and feel the discomforts of compulsion.
I raise this point because I am persuaded of the explanatory power of the Burress Curve. What is at stake is an economy that is directed in error toward more poverty, more friction, more waste or one that conforms with a reality that promises abundance (or at least relative abundance). The social indicia will be found in infant mortality rates, crime, alienation, suicides, insecurity and inequality of incomes, and similar statistics. Human happiness and unhappiness cannot be quantified, but they are nonetheless real and important. Life can deal some bad hands, but there is no good reason why they have to be made worse by our own refusal to consider evidence and act upon it. Glenn Burress himself will, I hope, one day give us the details of the trajectory of his life. It has the shape of a novel and offers a case study of the harms that parochial institutional imperatives and private agendas do to individuals and to the larger society.
4. From Phillips to Burress: A Brief Memoir
I write here critically of the economics establishment and follow the views of a dissenter. In fairness, I should state how I come to this position and pay tribute to the two professionals who have bracketed my exposure to this material.
I had always done well in economics, first in high school, later at M.I.T. Our text there was the mimeographed notes that later became Paul Samuelson’s famous textbook, and I did better in economics than in my electrical engineering courses. On the technical side, my focus was on servomechanisms. They were at the leading edge of technology, having been applied importantly to munitions during WWII.
After college, I met my two-year military service commitment in occupied Germany. I decided to stay in Europe and attend the London School of Economics. I had several reasons of which the two most intellectually respectable were a desire to explore the application of control theory to economic problems and the belief that economics was the ideal core subject for a modern liberal education. As it turned out, Arnold Tustin had written his book just before I arrived at L.S.E. and Bill Phillips had demonstrated his hydraulic model, satirized in a cartoon by Ronald Searle in Punch. Phillips was assigned as my tutor and he assigned a number of books by classical economists, mostly nineteenth century. It soon became apparent to me that I was not prepared to make the kind of contributions to economic knowledge that I had hoped, but I was thrown back on the idea of economics as a core subject.
Classical economics, as then conceived and still sometimes referred to as political economy, touched at its boundaries more related subjects than any other discipline. One saw intimate connections with mathematics, history, politics, psychology, ethics, philosophy, technology, and sociology. Phillips himself pointed out that novelists often had better explanations of the way the world works than do economists and other social scientists. One could use economics as an excuse to read almost anything if one took the point of view of examining its boundary conditions, and I did so. Phillips also put me on to Karl Popper’s The Open Society and its Enemies, a critique of the proto-fascism of Plato and the historical determinism of Marx, as a kind of cure for any ideological propensities I might have. While nominally a graduate student, I really spent that year acquiring a kind of undergraduate education to supply what had been missing from my engineering courses.
It became apparent that I really was not ready to take up serious graduate work either by mastery of economics or by personal inclination, so in the fall of 1954 I returned to the States. Among my reading at L.S.E. I had picked up a bit of Boolean algebra – then an advanced subject, now available to bright elementary school children – so I was able to get a job at I.B.M. doing design of large-scale computers. Through several jobs in computer engineering and then programming and management for various companies I still retained an interest in economics and did collateral reading, mainly at the level of the informed amateur. I was appalled by the course that the discipline seemed to be taking. Economists had turned inward, isolated the subject from its boundaries, apparently in compliance with the institutional imperatives of the academic world to stake out an exclusive mandate. Tustin’s work had never been picked up by anyone. Phillips’ curve was trivialized by being exploited as a pseudo-objective explanation of an ideological position and his true interest in cycle stabilization was ignored. Models were still static, equations still linear or at least closed. Not being equipped to determine humane policies, economics had become a slave to politics.
Then about three years ago I ran into Glenn Burress when he gave one of the talks at what was essentially a social conference. I was not immediately prepared for all he had to say, but he talked the language I understood and he shared my dismay at the state of economics. He identified directly the difference between mathematical and scientific paradigms. He combined the observational data with a coherent intellectual model in a way that made clear sense. His knowledge of the historical data is masterful and his predictions have consistently been accurate. Yet he was an outsider without an institutional connection. I have been enjoying weekly private seminars with Glenn and have been fortunate to be able to introduce him to the writings of Popper, Hardin, and Soros. He has given me a sense of closure to the year I spent 45 years ago at L.S.E.. Now I want him to be heard by others, not because he is a friend but because I believe he has much to say of great importance.
Endnotes
Return (1)
Paper presented at the 43rd Annual Conference of the International Society for the Systems Sciences, Asilomar, Pacific Grove California, July 1, 1999.
Return (2)
A.W.H. (Bill) Phillips was my tutor at the London School of Economics where I spent a postgraduate year. He was originally trained as an electrical engineer. Nicholas Barr (1988) has written a touching memoir about Phillips. I have reason to believe that Phillips did not give to the Phillips Curve the significance that others have; it was an incidental piece of work that wound up diverting attention from his principal interest in dynamic stabilization of economic fluctuations.
Return (3)
This phenomenon can be observed with respect to Adam Smith’s “invisible hand.” Smith’s model described a market that conformed to strict conditions (microscopic participants on both sides of the market, easy entry and exit, free access to information). The model has been misconstrued as a justification for laissez faire polices in inappropriate circumstances.- “The Market” is not a universal panacea for achieving efficiency or appropriate distribution of resources. See Hardin (1968) and Soros (1998).
Return (4)
Glenn Burress, who has a masterful command of the statistics, has pointed out to me “during the twenties, when the unemployment rate was reduced from 11.9% to 1.8%, the average inflation rate was negative. Then for the 180 months during 1951-65 the cpi was zero or less during 55 months. This was whenever the unemployment rate was reduced rapidly. In contrast, during the 240 months spanning 1966-85, there were only four months when the inflation rate was zero or less and this was when the unemployment rate was double digit, or near point D. It is clear to me that point C should be at a negative inflation rate with unemployment rate slightly below 2%.”
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