The economics profession lost one of its most respected members this past week. Robert Solow became well known for formalizing analysis of the economics of growth as well as for making complex ideas understandable to non-economists. In a recent piece in the Conversable Economist, Tim Taylor highlights what distinguished Solow from other economists, trained in the neo-classical tradition. In particular, Taylor cites the following two paragraphs from Solow’s 1979 presidential address to the American Economic Association. In this address, as well as in later contributions, Solow focused on the unique characteristics of labor markets in the U.S. and what cannot be easily explained through either neo-classical or heterodox economic analysis. In my view, Solow set the gold standard for how economists should think about public policy. (First Taylor, then Solow.)
“Solow is setting the stage for his discussion of unemployment by talking about a more fundamental issue in economics: the tension between recognizing the advantages of market mechanisms and also recognizing the limitations and costs of market mechanisms. Most economists (perhaps contrary to popular belief?) try to do both. Here, Solow describes his own attempt to hold the balance–which to some extent involves a contrarian reaction to whoever is speaking. As you read, consider in particular Solow’s gift for fluently combining technical and nontechnical language.“
There is a long-standing tension in economics between belief in the advantages of the market mechanism and awareness of its imperfections. … I think that outsiders, who tend to see economists as simple-minded marketeers, would be astonished to learn how much of the history of modern economic analysis can be written in terms of the study of the sources of market failure. The catalog runs from natural and artificial monopoly, to monopolistic competition, to the importance of public goods and externalities of many other kinds, to–most recently–a variety of problems connected with the inadequate, imperfect, or asymmetric transmission of information and with the likelihood that there will simply be no markets for some of the relevant goods and services….
There is a large element of Rohrschach test in the way each of us responds to this tension. Some of us see the Smithian virtues as a needle in a haystack, as an island of measure zero in a sea of imperfections. Others see all the potential sources of market failure as so many fleas on the thick hide of an ox, requiring only an occasional flick of the tail to be brushed away. A hopeless eclectic without any strength of character, like me, has a terrible time of it. If I may invoke the names of two of my most awesome predecessors as President of this Association, I need only listen to Milton Friedman talk for a minute and my mind floods with thoughts of increasing returns to scale, oligopolistic interdependence, consumer ignorance, environmental pollution, intergenerational inequity, and on and on. There is almost no cure for it, except to listen for a minute to John Kenneth Galbraith, in which case all I can think of are the discipline of competition, the large number of substitutes for any commodity, the stupidities of regulation, the Pareto optimality of Walrasian equilibrium, the importance of decentralizing decision making to where the knowledge is, and on and on. Sometimes I think it is only my weakness of
character that keeps me from making obvious errors.
No Con Economics 