Tag Archives: Economics

The microfoundationalist’s fantasy has a powerful hold on macroeconomists. They recognize that an agent-by-agent reconstruction of the economy is not feasible, but they argue that it is something that we could do “in principle,” and that the in-principle claim warrants a particular theoretical strategy. The strategy is to start with the analysis of a single agent and to build up through ever more complex analyses to a whole economy … The implicit argument in favor of...

 [embedded content] One of my absolute favourites. A gem of a movie showing the importance of chasing miracles. Hallelujah!

Friedman’s ‘as if’ methodology — a total disaster The explicit and implicit acceptance of Friedman’s as if methodology by mainstream economists has proved to be disastrous. The fundamental paradigm of economics that emerged from this methodology not only failed to anticipative the Crash of 2008 and its devastating effects, this paradigm has proved incapable of producing a consensus within the discipline of economics as to the nature and cause of the...

How evidence is treated in modern macroeconomics ‘New Keynesian’ macroeconomist Simon Wren-Lewis has a post on his blog discussing how evidence is treated in modern macroeconomics (emphasis added): It is hard to get academic macroeconomists trained since the 1980s to address this question, because they have been taught that these models and techniques are fatally flawed because of the Lucas critique and identification problems. But DSGE models as a guide...

How true is Friedman’s permanent income hypothesis? Noah Smith has an article up on Bloomberg View on Milton Friedman’s permanent income hypothesis (PIH). Noah argues that almost all modern macroeconomic theories are based on PIH, especially used in formulating the consumption Euler equations that make up a vital part of ‘modern’ New Classical and New Keynesian macro models. So, what’s the problem? Well, only that PIH according to Smith is ‘most certainly...

Gary Becker’s big mistake The econometrician Henri Theil once said “models are to be used but not to be believed.” I use the rational actor model for thinking about marginal changes but Gary Becker really believed the model. Once, at a dinner with Becker, I remarked that extreme punishment could lead to so much poverty and hatred that it could create blowback. Becker was having none of it. For every example that I raised of blowback, he responded with a...

Austerity policies — nothing but kindergarten economics [embedded content] I definitely recommend everyone to watch this well-argued interview with Steve Keen. To many conservative and neoliberal politicians and economists there seems to be a spectre haunting the United States and Europe today — Keynesian ideas on governments pursuing policies raising effective demand and supporting employment. And some of the favourite arguments used among these...

Good reasons to worry about inequalities Focussing upon inequality statistics … misses an important point. What matters is not just the level of income inequality, but how that inequality arose. A free market society in which high incomes arise from the free choices of consenting adults – as in Robert Nozick’s Wilt Chamberlain parable – might have the same Gini coefficient as a crony capitalist society. But they are two different things. A good reason to be...

Lucas-Rapping and ‘New Keynesian’ models of unemployment Lucas and Rapping (1969) claim that cyclical increases in unemployment occur when workers quit their jobs because wages or salaries fall below expectations … According to this explanation, when wages are unusually low, people become unemployed in order to enjoy free time, substituting leisure for income at a time when they lose the least income … According to the theory, quits into unemployment...

New Keynesian unemployment — a paid vacation essentially! Franco Modigliani famously quipped that he did not think that unemployment during the Great Depression should be described, in an economic model, as a “sudden bout of contagious laziness”. Quite. For the past thirty years we have been debating whether to use classical real business cycle models (RBC), or their close cousins, modern New Keynesian (NK) models, to describe recessions. In both of these...