However, Keynes did not agree with classical economist and neoclassical economist that the economy as whole will not be always at full employment level and if the market is not regulated it may go through booms and slums and unemployment may arise if the market forces determine all the allocation decisions and pricing decisions.
Identification problem is econometrics and E.J Working's solution to identification problem
Say for a market for a product supply and demand is given by
Q = d - ep-gP where Q is the quantity supplied, p is the price P is the price of raw materials. Say the demand depends on the price and the consumer income and say the
The demand equation is Q= -j + fp+kI where p is the price I is the consumer income. These are the structural equations of the model. Say from the above structural equation one solves for the p and Q and gets an equation in the form
P = x1+ x2P + x3I and Q = x4+ x5P + x6I then they become the reduced form of the structural equation. From the knowledge of the x1, x2, x3, s4, x5, x6 one can determine the structural parameters d, e, g, j, f, and k because from x1---x6 one can arrive at unique values of the structural parameters. In this model Q and p are indigenous variables and P and I are exogenous variables. In this situation the model is exactly identified because they can be derived from the reduced form of the model.
If say in the above model if one takes away the P and I as a simple model then the four structural variables of d, e, j, f have to be identified from two reduced form of parameters. That is the model is under identified. This demonstrates the identification problem in econometrics. E. J resolves partly the identification problem by an appropriate theory relating to the economic issue at question and pre-adjust the data to solve this problem.
Paul Samuelson's “Meaningful Theorem”
In Samuelson's point of view the “meaning full theorem” in economics is that an economic theorem is a hypothesis of the empirical data. That is the meaningful theorem is derived on the basis of the empirical data and if mathematically derived then it predictions of economic issues cannot be refuted in normal conditions and can only be refuted in ideal conditions. However, Samuelson's mathematical approach to economics assumes precision of prediction in the physical world and ignored the complexity of economic activity and his predicts from his economic approach has been found erroneous. For example he predicted there would be a recession after World War II and it did not materialize. His proposition of the concept of meaningful theorem and mathematical approach to economics is questionable because his predictions from his approach has found to be erroneous and many economists has highlighted many erroneous predictions of his approach and has theorems can be refuted on the basis of actual economic data. In this context Samuelson's definition of meaningful theorem is controversial.
Lemons Theorem and the Efficiency of Market System
Economist George Akerlof developed a theory of “Markets for Lemons”. In this theory in the market must have asymmetric information regarding quality of products and the seller must know better than the buyer and the buyer have uncertainty of the product regarding the quality of product before purchasing. In such a market condition the bad quality products tends to drive out the good quality products because the sellers of good products tend to withdraw their products from the market as the buyers tend to revise the average quality of products in the market and there fore may not pay the price sufficient for good quality products. In reality most markets are not lemon markets because if that is the case markets will exist. However, there is a tendency for any market to become a lemon market. That is without government protection of quality of products in the market and protects customers from sellers selling poor quality products as good quality products the market may become lemon market and the normal supply and demand may not become applicable. In summary, demand and supply laws are applicable to most markets and most markets are efficient in allocating scare resources. However, it is also a possibility they may become lemon markets if there is no consumer protection for consumers where there is asymmetrical information and there exists quality uncertainty in the market and there is no consumer protective laws in these markets.
That is some markets if such conditions exists the market efficiency will suffer without government regulation and government intervention in the market.
Hobson and Neoclassical Theory
Hobson criticised Ricardo's classical theory and anticipated the marginal productivity of labour. The neoclassical economist also rejected Ricardo rent theory. In this context Hobson and neoclassical economist agree. That is they agreed the capital and land as well as labour as factors of production will not earn more than the market prices and will not be earning a rent in a competitive market. As well, Hobson preferred capitalist reformation than communist revolution where the neo classical economist agrees with him.
An Economic Policy Impact on Relative Prices and Pareto Optimality
Pareto optimality means in an economic context that all economic agents benefit without at the same time some agents looses. That is if an economic outcome where some wins at the expense of some loose then it is Pareto optimality.Say a market economy is very competitive in most of the market and say the market prices reflect and adjust flexibly upwards and downwards and there is no externalities
then the market equilibrium and Pareto optimisation is it and any policy which distorts the market will make some economic agents loose and some benefit and at equilibrium it will not be Pareto optimum. However say in a market there exist many monopolies and monopoly pricing is widespread in most of the markets. In this market condition at market equilibrium The relative prices are away from competitive prices. There fore any policy, which makes the market competitive and reduce monopoly power will move the equilibrium towards Pareto optimum. There fore policy impact on relative prices depends on the structure of the market and the competitiveness of the market.
