by Modern macroeconomics — too much micro and not enough macro This paper … looks back into the pre-crisis (pre-2007) intellectual history of macroeconomic theory and argues that modern macro neglects the basic sources of both impulses and propagation mechanisms of business cycles. The basic problem is that modern macro consists of too much micro and not enough macro. Focus on individual preferences and production functions misses the essence of macro fluctuations — the coordination failures and macro externalities that convert interactions among individual choices into constraints that prevent workers from optimizing hours of work and firms from optimizing sales, production, and utilization. Also modern business-cycle macro has too narrow a view of the range of aggregate demand shocks that in the presence of sticky prices constrain the choices of workers and firms. Shocks that have little or nothing to do with technology, preferences, or monetary policy can interact and impose constraints on individual choices … Modern business cycle macro is littered with contradictions resulting from its attempts to combine market clearing and utility maximization at the level of the individual household with a form of price rigidity or friction.
Topics:
Lars Pålsson Syll considers the following as important: Economics
This could be interesting, too:
Lars Pålsson Syll writes Klas Eklunds ‘Vår ekonomi’ — lärobok med stora brister
Lars Pålsson Syll writes Ekonomisk politik och finanspolitiska ramverk
Lars Pålsson Syll writes NAIRU — a harmful fairy tale
Lars Pålsson Syll writes Isabella Weber on sellers inflation
Modern macroeconomics — too much micro and not enough macro
This paper … looks back into the pre-crisis (pre-2007) intellectual history of macroeconomic theory and argues that modern macro neglects the basic sources of both impulses and propagation mechanisms of business cycles. The basic problem is that modern macro consists of too much micro and not enough macro. Focus on individual preferences and production functions misses the essence of macro fluctuations — the coordination failures and macro externalities that convert interactions among individual choices into constraints that prevent workers from optimizing hours of work and firms from optimizing sales, production, and utilization. Also modern business-cycle macro has too narrow a view of the range of aggregate demand shocks that in the presence of sticky prices constrain the choices of workers and firms. Shocks that have little or nothing to do with technology, preferences, or monetary policy can interact and impose constraints on individual choices …
Modern business cycle macro is littered with contradictions resulting from its attempts to combine market clearing and utility maximization at the level of the individual household with a form of price rigidity or friction. Once the baby of full price flexibility has been thrown out, the bathwater must be changed because price rigidity is logically incompatible with market clearing … The contradictions come when modern macroeconomists attempt to explain non-market-clearing outcomes with market‐clearing language, or in Blanchard’s (2008) words “movements take place along a labor supply curve … this may give a misleading description of fluctuations.”