Some of the conclusions can be best understood in relation to the work of others. There are two sets of authors: those who take a general position and those who concentrate on the poverty issue.

Mankiw (1998)’s “Principles” textbook is becoming a corner stone in the education of economics - and very understandably so. As a teacher I would likely prefer this book myself too. It will be clear, however, that Mankiw’s book does not mention many of the fundamental points made here. This makes that one would wish, and in a sense should predict, that Mankiw adapts his text to them. My own suggestion however is that we allow students the advantage to better appreciate the gap between economic thinking ‘before’ and ‘after’ the current new analysis. Such appreciation will be an asset to their historical perception and understanding of the role of economics in society. So, buy both Mankiw’s book, as it is now, and this book, as a package deal.

Discussing income redistribution, Mankiw states: “(…) here we digress from economic science to consider a bit of political philosophy.” (p431) Tinbergen, Keynes, Marshall, Mill and Smith turned in their graves. Income redistribution and the underlying philosophies are a topic of Political Economy - and thus they still are economics !

Mankiw himself states: “When the government enacts policies to make the distribution of income more equitable, it distorts incentives, alters behavior, and makes the allocation of resources less efficient.” (p421) and “The more equally the pie is divided, the smaller the pie becomes. This is the one lesson concerning the distribution of income about which almost every one agrees.” (p441).

I find these statements problematic. The matter is put in a binary ‘pro-con’ manner. The same approach happens in the back of the book, when the student is confronted with ‘pro-con’ questions. Such an approach in itself stimulates debate, but decisions in reality are subtler. A ‘pro’ view can change into a ‘con’ view if a tax rate proposal differs by only a percentage point.

For the income distribution:

First of all, even if the pie would be smaller, the system still would be efficient. Mankiw uses the word ‘efficiency’ incorrectly, mixing up growth with efficiency, and stirring up adverse feelings against income redistribution by using a wrong accusation.

Secondly, indeed, if all incomes were equalised - as even the communist parties of Russia or China didn’t and don’t succeed in doing - the pie could get noticeably smaller. However, for the practical measures we are talking about - in the 40% - 60% range for the marginal rate - the change might not be that relevant. There are not only disincentives for the rich, but also incentives for the poor to participate in society. There are so many other effects. Alleviating poverty, by getting people into jobs, could reduce the crime problem. Or, a rich person may decide to work less and spend more time on a hobby or with the kids - and might find out that he or she is actually better off. The prime comment, and the prime economic observation, is that the pie itself is relevant, but the social utility derived from it is even more relevant. If a democratic, Madisonian, society decides to redistribute income, that itself is evidence and proof that it moves to a superior welfare position.

It is true that a rich person may earn $100,000 per annum and can be outraged by a 40% or 50% tax on it, claiming that society steals it. Strangely, while governments spend so much energy in monitoring the poor, they are quite reluctant to calculate the benefits going to the wealthy. The value of industries depends upon government regulations. The value of city property is also caused by public investments. What we earn now, depends so much on what our ancestors have been doing. It is truly difficult to determine what our own personal contribution is. The $100,000 earned are only the proceeds from a market situation - but the market is an amoral beast, and not a god of justice that allocates what people ‘deserve’. And thus, having such a marginal tax rate could well be one of the necessary ‘rules of the game’ to create a both prosperous and civilised society.

Mankiw shows an awareness of this on some pages, but not integrally so.

On the subject of designing an incentive compatible tax system, he states: “Thus, policy makers face a tradeoff between burdening the poor with high effective marginal tax rates and burdening the taxpayers with costly programs to reduce poverty.” (p440).

Well, indeed, this is the current view among economists - that this current book shows to be wrong.

Mankiw’s discussion on GDP seems rather balanced. Yet, for all his caution, he still seems to favour GDP as the “the single best measure for welfare”, or “a good measure of welfare for most - but not all - purposes” (p490). I think that the latter still is unwarranted, and I’d rather would favour the conclusion: GDP is a crude measure for income - and I would keep some distance from welfare implications.

Mankiw (p490) tries at a short ‘international comparison’, and shows that GDP per capita ‘tends’ to associate with a higher life expectancy. However, he uses India, while Sen (1998:47) - discussed below - argues that the substate of Kerala (30 million people - twice as many as Holland) is quite different. Table 17 gives the 1993 data of Mankiw and the 1994 data of Sen (read from the diagram). In short, the ‘tendency’ that Mankiw notes is much like the ‘storks and babies’ regression - if the data are right.

Mankiw p515 slips into a ‘summary statement’ that textbooks are inclined to provide but rather should avoid: “Richer countries have more automobiles, more telephones, more televisions, better nutrition, safer housing, better health care, and longer life expectancy.”

Why, oh why, argue that a GDP measure can do more than it can do ? Why create the suggestion that governments employ sufficient numbers of economists, and that we don’t need loads more ?

Mankiw’s discussion would benefit from reading Hueting (1980) and P. Dasgupta & K.-G. Mäler (1999) on the environment. And on the causes for famines (p531) he could also benefit from a closer study of Sen’s work. Perhaps there could be another ‘principle of economics’ here.

Krugman, Phelps, Ormerod and Heilbroner & Milberg have produced forceful analyses on the current state of the economy, society and economic theory itself, and all with a distinct attention for unemployment. These authors agree on many points, but disagree on major points too. Interestingly, where these authors disagree, my own work offers new answers, on angles clearly not considered by them. My analysis solves conflicts, fills gaps, and complements on useful points. By relating my work to theirs I hope to enable these authors and their readers to plug into - what I consider - a new synthesis for (a renewed) mainstream economics.

Mainstream economics appears to accept high rates of (equilibrium) unemployment as the apparent characteristic of the modern economy. In this view, unemployment is not inefficient, but the unavoidable price to be paid for other desirables. Take for example the case that the United States has low welfare provisions, less unemployment but more poverty and many prisons, while the European Union has high welfare provisions, high unemployment, less poverty and far fewer prisons: these differences then are explained in terms of political choices for example about institutions, labour market flexibility and employability; and it is suggested that such choices are made at the efficiency frontier. Research economists however are more focussed on the question whether current policy really is optimal and whether current unemployment is really (in-) efficient. The search is for a Pareto improving solution such that some can advance - notably the unemployed and the poor (underemployed) - without costs to the others.

Specifically, Paul Krugman, Edmund Phelps, Paul Ormerod, Robert Heilbroner & William Milberg) and myself have tried to supplement the mainstream approach. The first authors have received a lot of attention, but did not succeed in finding a Pareto improving solution to current unemployment. My analysis has received little attention, though I must confess that I did find such a solution.

In the following I’ll concentrate on the major issues, and then refer to that part of my own work that links to the work of these authors.

The other authors and myself have come up with different answers on the causes for and solutions to current unemployment. Table 18 reviews the different positions.

We may also note that most authors do not (explicitly) refer to each other. The reason for this may be practical, in that books that appear in 1995 may have difficulty to refer to Phelps (1994). We may also note that even though the inflation-unemployment relationship is crucial to the analyses of all, the focusses differ. Disagreement often leads to neglect rather than to explicit criticism, and it may well be that I have selected top scorers of different citation communities. However, all authors may be justified in neglecting one another. No one of them gives an essential contribution to the understanding of current unemployment. Theoretically their work might be skipped, as I did in practice while developing my analysis.

At a lower level, when we look into details, then there are more points of overlap. An analysis of a practical economic problem (in this case unemployment) of course must have an econometric substratum in order to be taken seriously. Table 19 contains three technical issues, the shift of the Phillipscurve and the influence of technology and globalisation in the model. Here economics would advance if the authors could convince each other (allow me to add: of my analysis).

It also appears that some of the differences originate from the styles of analysis, which styles also have to do with roots. Ormerod, Phelps and myself have econometric roots, Krugman’s first love was history (see Krugman (1993)), and Heilbroner is clearly a literary economist (‘though’ summa cum laude, Harvard 1940). (I don’t know about Milberg.) It is important to identify these styles.

I like to use econometrics in the way Jan Tinbergen did. It should be technically sound, but not fancy for reasons of its own; it should be relevant for a serious problem, and communicated to the general public in a responsible, modest but still clear manner (even if clarity makes it sound immodest). I also am very much interested in philosophical aspects (what H&M calls the ‘vision thing’), which however is not quite the style of Tinbergen. It appears that the various authors do not share all these qualities in the same degree. Taking these criteria to classify the four authors and myself gives Table 19. The names in the table are in alphabetical order. Actually, Table 19 summarises the discussion below.

Phelps (1994) is as creative as the others, but also the technically most advanced author who also presents econometric tests for some of his conjectures. His book is impressive.

My first reaction in 1994 to Phelps’s book was guided by his explanations in plain English. Given those explanations, his study dropped in my priority list. My attitude is (in line with Tinbergen and Keynes) that substance comes before technique. So it may come as a surprise to the reader that I as an econometrician did not jump to the occasion to comment on Phelps’s techniques and tests. But of course, had I had more time, I would have studied those pages too. And of course it is still appreciated that Phelps has produced these technical pages. They have affected his style, and they allow for wider tests at a later stage. Indeed, for the purposes of this chapter, I have looked into the estimation sections more deeply. My comments below however remain preliminary, since, indeed, I have not fully read all chapters.

The major comments are:

1.    Phelps (p374-375) is sceptical about how politicians abuse economics, and about how economists themselves react to (new) ideas.
Comment:
Talk to Krugman, and study my analysis on the Trias Politica.

2.    Phelps: “There is already a moral-philosophical case for employment subsidies targeted at the low end of the wage scale to bring the rewards for work not having a high scarcity value more nearly in line with the requirements of econmic justice.” (p366) and he seems to approve of proposals also made by Dennis Snower.
Comment:
I even show that these measures cost nothing and are Pareto improving.
Do you agree that there may be an ‘equilibrium’ in your sense, but inoptimal ? (See below.)

3.    Chapter 18 contains a ‘concise postwar economic history’.
Comment:
The reader is invited to compare that history with my amendment to the Bruno & Sachs story.

4.    Phelps catalogues monetary aspects as temporary (‘high frequency’) and nonmonetary aspects as structural (see p4 and 335).
Comment:
I agree that it is valuable to look at nonmonetary effects. But the major issue is the Phillipscurve, a relation between unemployment and inflation, and thus it is difficult to neglect monetary policy. When Central Banks have a wrong theory, and cause the rate of interest to rise, then this should be in the model.
On page 314, the acceleration of prices (change of inflation) is introduced in a Phillipscurve in an ad hoc manner.
Similarly, on page 329 the possible influence of Bretton Woods is discussed, and Phelps remarks that this system allowed for adjustable pegs - but then misses the point that the pegs were pretty fixed in practice.
No doubt, Phelps will agree that the whole story contains both elements.

5.    Phelps uses the calculus of variations, and his marginal tax rate is T(y)/ y.
Comment:
This is proper in this theoretical development, but it should be replaced by a dynamic marginal rate when the theory is translated to the real world. In chapter 29 it is explained what I mean by this, and it is shown that this dynamic marginal rate may be close to the average rate.
Curiously, Phelps’s econometric exercise uses average rates (p 314 & 318), and finds a contractionary relationship. In a sense, this supports my analysis, which allows lower average taxes and thus lower unemployment. However, I think that the estimated equation is too simple for the true model.

6.    Turnover costs appear to be very effective in one of the major models.
Comment:
That would mean that a simple subsidy would have huge effects. This does not seem realistic. The huge effect comes - I surmise - from the homogeneous labour assumption, and it is more appropriate to assume heterogeneous labour.

7.    “The shifts and long swings in unemployment are an equilibrium phenomenon, not a matter of misperceptions or misforecasts and consequent wage-price misalignments” (p vii). Phelps then uses “(...) the equilibrium case in the expectational sense of the term: the case of correct expectations about the course of the economy.” (p1)
Comment:
The Moon falling on and past the Earth - and expecting to fall so - is a story of disequilibrium and of equilibrating forces but also of equilibrium. What you use is just a matter of perception and of words. More important is the inoptimality of present unemployment.
Phelps writes on optimality: “(...) much of what we measure as unemployment reflects job rationing, hence is involutary and imposes private and social net burdens (...)” (p viii, see also Phelps p9).
Thus note that there is another concept of the “natural rate” (NAIRU), namely the market clearing rate. 
Even when expectations are correct - even when happens what you predict - then you can still be unhappy about that and look for change; and thus there can still be forces towards the clearing rate. Fulfillment of expectations is not the only utility that you are after. Phelps’s emphasis on the expectations definition suggests that his analysis is incomplete.
Inoptimality may also have causes in the political structure, a point that gets less attention by Phelps regardless of his comment on p374-375.

The book’s name “The death of economics” is not inviting to serious research. One may appeal to a “The King is death. Long live the King !” approach, and indeed Ormerod’s last chapter “Economics Revisited” seems to suggest this. But this is so round-about and distractive ! Why first make people believe that you want to get rid of economics, and then tell them that you have a better economic analysis ?

This way of presentation also gives too much credit to decisions makers. Politicians and economic advisers who believed in those theories are presented as misguided persons, and victims of failing theories of old. Just as anybody can make errors. However, the proper story is that illusions and ideological views have been maintained in the face of contradictory evidence, and against the advice of renowned economists. Ormerod’s presentation obscures this evidence and its meaning. The proper story, that Ormerod misses, poses the question of reform in the structure of economic decision making.

Agreed

I agree with Ormerod: “The whole challenge of economic policy is to shift the attractor points around which the economies move, and hence the whole solution path of the economy over time.” (p208)

Disagreed

1.    He claims that there is a new analysis of unemployment moving around an “attractor” (that itself can move).
Comment:
This attractor is nothing else but the NAIRU. It is true that it can be clarifying to shift from the conventional parlance to the parlance of chaos theory, but it is not revolutionary as claimed. The same immodesty as Phelps.

2.    He defends the macro-economic approach, e.g. on using a rather simple relation between inflation and unemployment.
Comment:
Defence is fine, but the correct approach still is based upon micro-foundations.

3.    Ormerod writes: “The distinguishing feature of chaotic systems is that their behaviour is impossible to predict in the long run (...)”
Comment:
The word “chaotic” means “deterministic looking like random” in mathematics. Above quote is only true for (systems of) equations with a random term somewhere.
“Chaos” has the connotation “random” in the public mind, so it might be best not to use the term in books for the general public.
Ormerod gives much attention to uncertainty, and the way that he presents it carries with it the suggestion that nothing can be done about unemployment. Though uncertainty is important to macro-economics indeed, it however is not really relevant for his main thesis that something could be done about unemployment. Quite tiring.

4.    He claims that the 1950s were a special period of reconstruction, in the sense that the success of these years is not easily repeated.
Comment:
In my analysis, the conditions of economic success can be influenced, and similar results achieved again. The mood of optimism would follow the results, rather than conversily (though there is feedback too, of course).

5.    Ormerod: “So what can be done ? One solution to the problem of high European unemployment, for example, is work-sharing.” (p207) To achieve this, he appeals to social values.
Comment:
But work sharing is not necessary (see my work in general), and less easy to achieve anyway.

6.    Ormerod: “But perhaps the most important point of all, linked though it is to the underlying mathematics, must be stated in words, for it is a question of moral values. The concept, rampant in the free-market philosophy of the 1980s, that there is no such thing as society is one which, if it is allowed to persist, will prevent the creation of full employment regardless of the form which economic policy takes.” (p211)
Comment:
There is little use in discussing whether there is or is no “society”, since it would seem to be a matter of definition. If a government would choose not to solve unemployment, then this should be accepted in a democratic society. It is a different thing that we now can show a solution to inefficient unemployment, since that is a matter of logic and intellectual honesty.

Heilbroner & Milberg (1995) are very wordy and imprecise - and the many words are used for hyperbole instead of exactness. It is very easy to get irritated.

There are only a few points that I agree with, but even these points are formulated vaguely and annoyingly, and my comments are guarded. Also, to reduce the irritation, I only usefully comment mainly on chapters 1 and 7:

All authors advise their colleagues, policy advisers and politicians. All however accept the current institutional setting of economic policy making, and accept that their thoughts get less unbiased attention than could be useful.

My advice however is a constitutional amendment for an Economic Supreme Court. The lack of sufficient checks and balances is a major cause for the tragic economic record of the last century. When experts know of Pareto improving possibilities, then policymakers have too much freedom to neglect this. Policymakers have too much freedom to pursue their own pet theories even in the face of contradictory evidence.

When Amartya Sen writes a book, it is likely a useful one. Sen (1999a) will help economists to refocus on freedom instead of income, as Hayek once tried but failed to convince. Sen admits that his message is not new (see p289). But when it has been forgotton, or told unconvincinly, then it sounds pretty new.

One of the prime reasons why Sen is convincing, is that he makes the connection with Adam Smith’s ‘sympathy’ argument. Sen is both liberal and social, and presents freedom as a private and social goal. Hayek often got out of touch with ‘sympathy’, or at least allowed that reputation to grow.

One of the prime reasons why economists have been seduced to put income before freedom is pure pragmatism. Income is a quick and dirty variable - and by itself already hideously complex to properly administrate and monitor. Income tax laws and the execution of them require huge bureaucracies. Price index measurements are a monk’s paradise. Maintenance of fair incomes requires extensive labour relations and social security laws. And this is just simple income.

If we would look at the freedoms, then we get unobserved variables, their unobserved shadow prices, and a proliferation of equity questions. While we seem to have gotten used to a concept like the ‘income distribution’, we draw a blank with a ‘freedom distribution’. The issue of the (im)possibility of utility comparison comes strongly to the fore again - and the question again arises whether ‘utility’ is a proper concept in the first place anyway.

The fact that income is such a pragmatic variable however does not absolve economists from their task of thinking about the proper meaning of, and means for, The Good Life. While it certainly may take some centuries more to solve most of the Grand Problems of the ‘freedom distribution’, in the short run economists still need to think on the matter.

One of the most powerful arguments in Sen’s book is that he shows that some policies are clearly misguided from a freedom point of view: So that we don’t need Grand Solutions to start correcting some errors already. Where developing countries experience problems providing for basic freedoms, there we find that many of these already have been solved to some extent, namely in the Western nations.

Sen slowly but systematically demolishes the ‘different cultures’ arguments, and shows that these cannot be used to withhold basic freedoms. The idea, so popular in the West - and a reference is Barro (1996) - that poor countries first need to develop up to a certain income level, before they can afford e.g. democracy, is a contradiction in terms, a serious error of judgement, and a disaster for the billions of paupers concerned: for they are denied their freedoms and thus will remain poor and underdeveloped for much longer. The pitfall for (regression) analysts like Barro (1996) is that they take income as the prime target, and investigate whether ‘more freedom’ correlates with ‘more income’, presuming that the latter is the most interesting. But when the true variable is The Good Life - also defined by a low infant mortality or the absence of famines - and when it can be shown that it requires a certain level of democracy if such horrors as famines are to be prevented, then such (regression) analyses are terribly misguided.

Perhaps this summary does injustice to the intentions of these researchers, but the point is true that there exist such views, and that Sen is only one of the few academics to seriously oppose them.

Solutions for freedom as they exist in the West can be tried in the developing countries as well, and, while cultural adjustments indeed may be required, adjustment is something else than withholding.

Sen’s analysis will provoke much discussion. Researchers, like Barro, will be challenged to reconsider the issue. The policy makers at the World’s capitals will be challenged as well. Certainly the ‘cultures’ argument will be a strong subject for contention. The prime thing to hope, however, is that the academic tendency to research, research and research will not be abused by the politicians to bury the Sen argument - and we can only hope that the scientists are aware of their responsibility in this.

On the cover of the book, Kofi Annan, the UN Secretary General, already states gratefully that the UN “has benefited immensely from the wisdom and good sense of Professor Sen’s views”. This is wonderful recognition. But we can clearly see that this is only a beginning of a longer change. As a question, that I perhaps may raise myself, I wonder whether it would not be time to take the World Bank from its current track on traditional ‘income economics’, in which it has become so set in its ways, and change it to monitoring the freedoms. On second thought, it would be a pity to throw this current expertise away, since income still is something useful to have - if I may put it that way. Would it not be much better to create a new ‘Liberty Board’, or whatever name, for the administration, help, guidance and inspection on such freedoms ? In fact, as Sen clarifies, the freedoms can arise in all dimensions of human life, and can have surprising interconnections. Logically, one would have to monitor freedoms in all such dimensions - as, in fact, governments in Western nations have all kinds of Ministries and Agencies. Logically, again, the UN might as well mirror that kind of organisation. “Rest assured,” I once remarked to Jan Tinbergen, “that world government will come about surely, one day.” - and I got a smile as a response. It would be good if this logic could be echoed in the advice of our fellow economists to the larger public.