Tuesday, March 6, 2012

"Unemployment is an illusion and recessions are voluntary"

An illuminating speech by Paul Krugman:
... I assume that most of those hearing or reading this speech at all closely are aware of the great divide that emerged in macroeconomics in the 1970s. For those who aren’t familiar with the story: in the 1930s Keynesian economics emerged as a response to depression, and by the 1950s it had come to dominate the field. There was, however, an undercurrent of dissatisfaction with that style of modeling, not so much because it fell short empirically as because it seemed intellectually incomplete. In “normal” economics we assume that prices rise or fall to match supply with demand. In Keynesian macroeconomics, however, one simply assumes that wages and perhaps prices too don’t fall in the face of high unemployment, or at least fall only slowly.

Why make this assumption? Well, because it’s what we see in reality – as confirmed once again by the experience of peripheral European countries, Portugal included, where wage declines have so far been modest even in the face of very high unemployment. But that’s an unsatisfying answer, and it was only natural that economists would try to find some deeper explanation.

The trouble is that finding that deeper explanation is hard. Keynes offered some plausible speculations that were as much sociological and psychological as purely economic – which is not to say that there’s anything wrong with invoking such factors. Modern “New Keynesians” have come up with stories in terms of the cost of changing prices, the desire of many firms to attract quality workers by paying a premium, and more. But one has to admit that it’s all pretty ad hoc; it’s more a matter of offering excuses, or if you prefer, possible rationales, for an empirical observation that we probably wouldn’t have predicted if we didn’t know it was there.

This, understandably, wasn’t satisfying to many economists. So there developed an alternative school of thought, which basically argued that the apparent “stickiness” of wages and prices in the face of unemployment was an optical illusion. Initially the story ran in terms of imperfect information; later it became a story about “real” shocks, in which unemployment was actually voluntary; that was the real business cycle approach.

And so we got the division of macroeconomics. On one side there was “saltwater” economics – people, who in America tended to be in coastal universities, who continued to view Keynes as broadly right, even though they couldn’t offer a rigorous justification for some of their assumptions. On the other side was “freshwater” – people who tended to be in inland US universities, and who went for logically complete models even if they seemed very much at odds with lived experience.

Obviously I don’t believe any of the freshwater stories, and indeed find them wildly implausible. But economists will have different ideas, and it’s OK if some of them are ones I or others dislike.

What’s not OK is what actually happened, which is that freshwater economics became a kind of cult, ignoring and ridiculing any ideas that didn’t fit its paradigm. This started very early; by 1980 Robert Lucas, one of the founders of the school, wrote approvingly of how people would giggle and whisper when facing a Keynesian. What’s remarkable about that is that this was all based on the presumption that freshwater logic would provide a plausible, workable alternative to Keynes – a presumption that was not borne out by anything that had happened in the 1970s. And in fact it never happened: over time, freshwater economics kept failing the test of empirical validity, and responded by downgrading the importance of evidence.

Read the whole thing.

24 comments:

  1. topic post very interesting to read and very informative




    Mutual Fund

    ReplyDelete
  2. Mark,

    I wonder if the fact that wages do not fall quickly is due to labor market "infrastructure". The employment market is a very "sticky" one, people simply do not walk into work one day and have their employer tell them they will be making less that day, so there is a a long time decay.

    Yet over the course of years, this can in fact play out. I am reminded of the story (a news show magazine profile, or a book, or both, it was a while ago) of some high-level corp. executive who now works at Starbucks and has learned to be ok with it.

    ReplyDelete
    Replies
    1. I've found this very interesting and has a good stuff for the readers and designeonline pharmacy valium
      rs. I would be glad to recommend the post for its quality content. Nice post.

      Delete
    2. My brother recommended I might like this blog. He was totally right. This post actually made my day. You can not imagine just how much time I had spent for this info!
      Buy Sleeping Tablets Online

      Delete
  3. In today’s economy its difficult to find a job that pays good enough to live on and is stable . I have discovered that if you just work hard and are consistent you can go places . Look at the author of this page , they are obviously a hard worker and have just been consistent over time and are now enjoying at least what would appear as somewhat of a success. I would encourage everyone to just keep hustling and moving forward.

    Regards!
    Bruce Bent II

    ReplyDelete
    Replies
    1. This is a nice post in an interesting line of content.Thanks for sharing this article,HayCompras
      great way of bring this topic to discussion.

      Delete
    2. Hi! Thanks for the great information you havr provided! You have touched on crucuial points!
      buy stilnoct online

      Delete
  4. I'm planar by your table make up the superior production.
    payday loan rate

    ReplyDelete
    Replies
    1. Thank you for this post. Thats all I are able to say. You most absolutely have built this blog website into something speciel. You clearly know what you are working on, youve insured so many corners.thanksBuy 1 Million Facebook Fans

      Delete
  5. I feel ecstatic I found you website and blogs.payday advance loan

    ReplyDelete
  6. Paul Krugman writes some really good pieces. Sometimes he can be too Liberal, but his intelligence always carries him. postcard advertising

    ReplyDelete
  7. This blog is truly awesome in all aspects.online paydayloans

    ReplyDelete
  8. I guess I have selected a mind blowing and interesting blog.
    carloanestimator.net

    ReplyDelete
    Replies
    1. Taking a leap of faith allows the net to appear for you. It is amazing what positive expectations can do. It is true for me and it is true for you. Try it. Trust it. Do it.
      Buy Sleeping Tablets

      Delete
  9. I like all information that you provide in your articles.
    instant payday loans

    ReplyDelete
  10. Nice answers in replace of the question with real point of view and explaining about that. payday loan

    ReplyDelete
  11. Hi to everybody, here everyone is sharing such knowledge, so it’s fastidious to see this site, and I used to visit this blog daily.
    online payday loans

    ReplyDelete
  12. If you should be opting for finest contents like me, just visit this blog site daily because it provides the feature contents, thanks.
    www.autoloanmiami.net

    ReplyDelete
  13. I thought it was going to be some boring old post, but it really compensated for my time. I will post a link to this page on my blog. I am sure my visitors will locate that extremely useful...  
    Sleeping Tablets Online

    ReplyDelete
  14. I am so much pleased to get this planning. I am looking ahead to read more about it. This is a very lovely post.
    buy stilnoct no prescription needed

    ReplyDelete
  15. There is so much in this article that I would never have thought of on my own. Your content gives readers things to think about in an interesting way.
    salt lake city consignment shops

    ReplyDelete
  16. I daily visit this blog and found updated news. These tips very beneficial for all the traders.For more live market news you can visit Epic Research.

    ReplyDelete
  17. To have a better hype for your facebook account, Persons expend funds to Buy Facebook Followers to conveniently have hype online. buy facebook followers cheap

    ReplyDelete