Let me tell my story using the following table, which shows the primary causes of economic fluctuations according to different economists.:
| Animal Spirits, Liquidity Preference |
Monetary Shocks | Productivity Shocks | Recalculation |
|---|---|---|---|
| Keynes, Akerlof-Shiller, Krugman | Lucas, Dornbusch, Fischer, Blanchard | Prescott | Clower, Leijonhufvud, Hayek, Kling |
Macro practitioners (the people who report that the multiplier is 1.54) use econometric models that do not fit into any of the columns in the table. What is wrong with those models is a whole other story.
Basically, over the past thirty years, the economics profession gravitated toward the center or the table, with a focus on monetary shocks and productivity shocks as the causes of macroeconomic fluctuations. There was an emphasis on a particular “haiku,” as Blanchard calls it, of Dynamic Stochastic General Equilibrium (DSGE) modeling.
Krugman, Blanchard, and I were students at MIT in the late 1970’s, when Dornbusch and Fischer were young professors who proceeded to dominate macroeconomics in the department, displacing older Keynesians. They put MIT on the path of focusing on monetary shocks, and they created an environment in which the saltwater economists of MIT could join with the freshwater economists of Chicago and Minnesota in what I consider to be the fruitless mathematical exercises of DSGE.
Blanchard embraced Dornbusch and Fischer, and he went on to teach at MIT (although at the moment he is on leave as chief economist at the IMF) and to become a co-author of their macro textbook. Krugman retreated from macroeconomics altogether, and had to settle for Nobel Prize in international trade. I retreated even farther, and I have never held a tenure-track position in economics. As my initial reaction to Krugman’s New York Times piece showed, Krugman and I have some common enemies here, even though I would put us in different columns in the table.A monetary shock is a change in the growth rate of money that surprises the public. It has always seemed to me such a silly way to characterize macroeconomics that it is hard for me to try to explain it with a straight face. Basically, all of us are happy and fully employed, and then one day the central bank secretly withdraws money from the system. This causes great confusion, and real wage rates are in disequilibrium for a while, causing unemployment. Again, I cannot tell this story with a straight face, but if you ask any mainstream macroeconomist who did graduate work in the last thirty years they should be able to make it sound convincing.
A productivity shock is something that affects aggregate productivity. Not by accident did this story emerge in the wake of the surges in oil prices in the 1970’s, which raised costs of production and consumption in many industries. However, it never was a convincing story for the Great Depression–although some people, like Cole and Ohanian, certainly have tried it there.
Animal spirits for Keynes represented the impetus to investment in a world of unknowns. For Akerlof and Shiller, animal spirits is a much broader term. I think they have mis-appropriated the term to cover all sorts of deviations from the classical rational model. I like the original Keynesian notion of animal spirits, although I might prefer to supplement changes in the optimism of entrepreneurs with changes in the risk perceptions in financial markets. The latter might loosely be termed a Minsky model. I don’t think there is much in Minsky worth adopting, but the idea that risk perceptions are cyclical has great merit.
Liquidity preference says that something special happens when people save in the form of money. According to this view, if instead we saved in the form of goods, then an increase in saving would not decrease the demand for output.
As much as I like animal spirits and cyclical risk perceptions, I am inclined to reject the liquidity preference story. I do not think that attaching significance to money as a store of value is the right way to pursue macro. Hence, I reject Krugman’s babysitter co-op parable as a useful story. In that parable, it is clear that liquidity preference destroys the economy, because there is no way to store babysitting over time. Relative to the real world, in which there are many ways to trade future consumption for current consumption, I think that story is highly misleading.
Instead of liquidity preference, I prefer to focus on problems of recalculation. Suppose that the economy needs to get from one equilibrium to another. In the first equilibrium, we build lots of houses and start few high-tech businesses. In the second equilibrium, we build few houses and start lots of high-tech businesses. Getting from one equilibrium to the other requires countless recalculations, wage adjustments, and movements of resources. These do not happen instantly or simultaneously. Instead, along the way there are frictions and miscalculations. These produce unemployment, and indeed we never get to the same equilibrium that we would have arrived at had the recalculation occurred instantly.
In my opinion, the state of macro is very bad (if anything, worse than Krugman makes it out to be), because nobody followed up on the thinking of Clower and Leijonhufvud. The main villains in my story are Dornbusch, Fischer, and Blanchard. I have nothing against them personally, but I think that their influence on the profession has been excessive and adverse.
Some previous posts on the state of macro:
John Quiggin on macro
Laidler and Sumner on the state of macro
The Recalculation Model, Simplified
Krugman vs. Blanchard onn the State of Macro
Lectures on Macroeconomics
READER COMMENTS
fundamentalist
Sep 18 2009 at 10:32am
Nice article! Thanks!
One quibble, Hayek should also be in the monetary shocks column, even though he would define it differently. Instead of the feds withdrawing money suddenly, the feds (or the banking system) expand credit too much and that leads to the imbalances that make the recalculation necessary. You could summarize the Hayekian business cycle this way: monetary pumping inflates the bubble; the invisible hand pops it!
thruth
Sep 18 2009 at 10:38am
“A monetary shock is a change in the growth rate of money that surprises the public. It has always seemed to me such a silly way to characterize macroeconomics that it is hard for me to try to explain it with a straight face. Basically, all of us are happy and fully employed, and then one day the central bank secretly withdraws money from the system. This causes great confusion, and real wage rates are in disequilibrium for a while, causing unemployment. Again, I cannot tell this story with a straight face, but if you ask any mainstream macroeconomist who did graduate work in the last thirty years they should be able to make it sound convincing.”
Wouldn’t a monetary shock also be caused by a change in the (precautionary) demand for money such as might happen when a debt overhang creates a run on the financial system? The most direct way to resolve that problem is for the govt to “print” more money. (Even better of course, is to not get ourselves into that situation in the first place, but that’s not going to be an easy fix).
Ryan
Sep 18 2009 at 11:46am
Dr. Kling, your story appears to me to be essentially a Misesian one. Like you, I think certain components of the other viewpoints (Krugman/Shiller, Dornbusch/Fischer) are partially correct, but they fail to grasp the real world implications. Monetary shocks do have certain disruptive effects. I like to think of new money creation as a sort of flow as it permeates its way throughout the economy. When the creation of new money decreases, the business projects and consumptive activities that were benefitting from that marginally higher dollar flow no longer are remunerative; capital and labor–real resources–must be shifted into other pursuits, and this “recalculation” as you like to put it is the necessary process for this readjustment to occur. This readjustment takes time, which you are apt to recognize. But this is basically a Misesian story to me. The business projects and consumptive activities that made sense under conditions of a larger amount of new money creation are sources of a false prosperity, the so-called malinvestments that Austrians are wont to describe.
This recalculation is fundamentally a good thing, and one that must be undertaken if the economy is to establish a more sound foundation for growth. Unfortunately current government policy is aimed at forestalling the necessary readjustment or attempting to eliminate it altogether. I think this is the part where I should tell you to have a nice day 😉
winterspeak
Sep 18 2009 at 11:46am
ARNOLD: If you looked more deeply into how balance sheets work at the household and bank/federal reserve level, you would not be so quick to dismiss the liquidity preference story.
Saving in the form of money reduces incomes. This is because saving is no one’s income, and consumption/investment is someone else’s income. This is a critical difference between micro and macro. Banks do not lend out savings as bank lending is not reserve constrained.
Right now, the US has a dramatic increase in savings (liquidity preference clearly changes dramatically). This has had a clear effect on aggregate demand. Only Government deficit spending can fund this private liquidity preference. The Government is a monopoly provider of reserves — this is material.
If the monopoly provider of this important good does not do its job, it messes with the “recalculation”. This is also something we see clearly right now.
THRUTH: I think your “change in the (precautionary) demand for money” is what arnold is characterizing as a change in “liquidity preference”, or in more normal language, an increase desire for private sector savings. The only way for the private sector to get these savings is if the Govt funds it via deficit spending, as Govt deficit and private sector savings are two halfs of the same coin.
thruth
Sep 18 2009 at 12:11pm
“THRUTH: I think your “change in the (precautionary) demand for money” is what arnold is characterizing as a change in “liquidity preference””
you’re probably right, but …
“… or in more normal language, an increase desire for private sector savings. The only way for the private sector to get these savings is if the Govt funds it via deficit spending, as Govt deficit and private sector savings are two halfs of the same coin.”
I’m not sure it is the same thing. In a financial crisis people and firms want money and money substitutes, not savings per se. Building a bunch of freeways gets at the problem in a really backhanded way. More direct attempts to create the desired money or prop up velocity via support to the financial system would seem more effective.
pushmedia1
Sep 18 2009 at 12:26pm
Prof. Kling,
All four sorts of shocks can and have been modeled in the DSGE framework. Look it up.
fmb
Sep 18 2009 at 1:34pm
I think it would be interesting to see a rough cut at some numbers for the current crisis through the lens of recalculation. For example, suppose housing construction came to a complete halt — how much of our current increase in unemployment would that actually explain?
My instinct is that if you tally up the sectors needing major reductions, make assumptions about how long it takes those individuals to find new work, and so forth, you’d wind up with a predicted increase in unemployment materially smaller than what we’ve experienced.
Daniel Kuehn
Sep 18 2009 at 1:35pm
Very interesting post. Is it odd that I find both the Keynesian and the recalculation approach to be the convincing ones?
I’m very convinced not just by the Minsky model of financial fragility, but the Samuelson oscillator approach too. Some sort of oscillation process has to be involved given the regularity of recessions. If it were just shocks – monetary, productivity, you name it, or the Austrian shock of mal-investment that emerges from idiosyncratic central bank behavior – I don’t think we’d expect this degree of regularity. The question is, given those sort of oscillators (and various others are out there, I’m sure) – what makes some recessions particularly bad? I think you and Krugman/Keynes both nail it. The recalculation and the liquidity trap dynamics that exascerbate natural swings. I don’t see why these have to be opposed or why anyone should feel that they have to choose. It seems reasonable to me that both processes are in effect.
Arnold – I was wondering if you’ve ever read Krugman’s “The Self Organizing Economy”. It’s been a while, but if I remember right he has a multiple-equilibrium type model of the business cycle that leads to very sharp adjustments. I’m not too familiar with the “recalculation school” – but is this similar to what you are saying? Could you point out some of the recalculation literature for us?
Daniel Kuehn
Sep 18 2009 at 2:00pm
Not to mention… isn’t the collapse of animal spirits essentially the same thing as recalculation?
Is the idea of recalculation that the intitial calculation was right in addition to the subsequent calculation being right – whereas animal spirits say the initial calculation was wrong and the subsequent calculation was right?
I don’t know – upon thinking about it, these two seem closer than I had originally thought. And a recalculation sounds an awful lot like a collapse in investment demand.
Greg Ransom
Sep 18 2009 at 2:23pm
I really like this casting of the matter:
“the idea that risk perceptions are cyclical has great merit”
Hayek specifically identifies this kind of thing as one of the possible generators of a “recalcuation” artificial boom and inevitable bust in his _Monetary Theory and the Trade Cycle_.
Hayek calls his theory a “monetary” explanation because it is the existence of banking, leverage and credit — and the ability of private financial institutions to expand the stock of money and credit — which allows this sort of change in risk perception to distort the real structure of alternative production paths across time.
Greg Ransom
Sep 18 2009 at 2:28pm
Hayek explicitly says that private finance can distort the structure of production — for example due a bandwagon bubble of false optimism — and no central bank action is necessary to do it.
“fundamentalist” wrote:
“You could summarize the Hayekian business cycle this way: monetary pumping inflates the bubble; the invisible hand pops it!”
Greg Ransom
Sep 18 2009 at 2:34pm
Clower and Leijonhufvud are terrific.
Why haven’t these guys won Nobels?
Floccina
Sep 18 2009 at 4:09pm
@winterspeak why would government have to provide it through Government deficit spending cannot the Fed provide cash by buying assets?
Lawrence Kramer
Sep 18 2009 at 4:56pm
I wonder if you don’t need a separate column for “Globalization Shock.” The cause of the late and enduring unpleasantness is the end of distance as a relevant aspect of economic activity. The “shock” lies in the change in the comparative advantage landscape: we don’t have enough of them any more to sustain the level of imports we want. The system tries to “recalculate” by creating homogenized investment instruments, but the demand for good paper is overwhelming, and we ultimately turn to counterfeiting (what else is a sub-prime mortgage?) to create adequate apparent supply. Then the music stops and everyone has to find a column to sit in. But there aren’t enough…
winterspeak
Sep 18 2009 at 5:26pm
thruth: If the private sector decides, for whatever reason, to increase its demand for net savings (or more particularly, the equity entry on the liability side of their balance sheet) it will move into a deflationary spiral until that demand for savings is met by Government deficits. This is because an economy trying to spend less of its income will reduce its income and thus not be able to meet its saving goal.
The best way to deal with this is simply to stop taking away private sector income via taxation until that savings demand is met. A payroll holiday would work.
FLOCCINA: The Fed’s activity changes the constitution of financial assets, but cannot increase the equity entry on the liability side of the balance sheet. The Fed can change prices (interest rates) but not quantities. The adjustment can only be fiscal.
Our 10% (and climbing) unemployment rate is NOT being driven by out-of-work real estate agents and builders. It’s being driven by a general lack of aggregate demand as the private sector tries to save but cannot because the Government deficit is kept from getting large enough.
CWK
Sep 18 2009 at 8:05pm
Is it possible we’re diagnosing the symptom rather than the disease? Reading about all the possible explanations for a drop in GDP, I wonder if recessions aren’t the economic version of “consumption” which killed so many people prior to the 20th century.
thruth
Sep 18 2009 at 9:50pm
winterspeak writes: “thruth: If the private sector decides, for whatever reason, to increase its demand for net savings (or more particularly, the equity entry on the liability side of their balance sheet) it will move into a deflationary spiral until that demand for savings is met by Government deficits. This is because an economy trying to spend less of its income will reduce its income and thus not be able to meet its saving goal.”
I don’t think the “for whatever reason” is true (the logic reads like a static Keynesian analysis). Consider a time preference shock, which causes households to raise their demand for saving at the expense of consumption. In normal conditions, even if the precautionary shock drives households into t-bills, the financial sector can simply lever up (perhaps with a little help from the Fed) and ensure the redirected funds channel to productive use (e.g. investment). I don’t see a deflationary spiral here or any need for govt deficits.
The pre-condition for a deflationary spiral seems to be disintermediation in the financial sector. Funds directed to safe assets aren’t going to be put to productive use if the financial sector is basically insolvent. That insolvency is driven by a *nominal* debt overhang, which can be addressed in a variety of ways including monetary policy (though conventional policy is likely to be less effective when the problem is credit related), broad deficit spending to stimulate activity, or more targeted financial market interventions to directly address insolvency (asset guarantees etc.). It is far from clear cut what the best policy is.
I’ll concede that payroll tax cuts are a reasonable though politically unrealistic solution (the next best thing to a helicopter drop?)
Winterspeak
Sep 18 2009 at 11:24pm
Thruth: I used to think the same thing but I was wrong. I specified “the equity line” on the liability side of the balance sheet for a reason because this really cannot be filled by bank lending
more to the point banks are part of the private sector and I specified net private sector savings. The bank private sector can “lever up” to balance the non-bank private sector but the entire private sector cannot increase net savings unless a non-private sector (gov) dissaves. This is true as matter of accounting
also, you seem to beleives , as I once did, that banks lend out savings, so if the private sector increases savings, banks can just lend it out and put it to productive uses. In reality, banks do not lend out savings, they make loans based on ability for the loan to be paid back and capital constraints. It has nothing to do with savings or reserves. In an economy with falling invomes and rising defaults, banks automatically tighten credit. Surely you’ve noticed how pro-cyclical bank lending is. You need to be a macro economist to miss that!
Thomas Esmond Knox
Sep 19 2009 at 12:37am
What about:
“Noise” Fischer Black
and, if “re-calculation” is a starter,
what about
“Transaction Costs” Ronald Coase.
So far as I am aware, there is no “Law of One Cause”.
thruth
Sep 19 2009 at 9:11am
“Winterspeak writes: Thruth: I used to think the same thing but I was wrong. I specified “the equity line” on the liability side of the balance sheet for a reason because this really cannot be filled by bank lending”
Lets be clear. You said deflations stem from an increase in demand for net savings “for whatever reason”. I gave an example straight from the classical textbook that shows that a shift in savings demand need not have a deflationary consequence. Thus, changes in aggregate savings aren’t a sufficient condition for deflation.
I want you to be more precise about the deflationary mechanism. The fact that households want to increase their “equity” is indistinguishable from saying they want to increase savings. By definition, that’s what savings will do. What’s more relevant is that households have very little equity and lots of debt, as do firms and banks, which creates perverse incentives.
“the entire private sector cannot increase net savings unless a non-private sector (gov) dissaves. This is true as matter of accounting”
They don’t need to, they need to channel savings to investment.
Closed Economy
Y = C + S + T
C declines, S increases — no problem
Y = C + I + G
C declines. So long as I increases we don’t have a problem. We get that problem when financial intermediation breaks down (e.g. because of debt overhangs).
“also, you seem to beleives , as I once did, that banks lend out savings, so if the private sector increases savings, banks can just lend it out and put it to productive uses.”
no, I don’t believe it’s alway true (though usually its a good approximation). I just used it as a counter example to your assertion that a fall in savings is always a problem.
” In reality, banks do not lend out savings, they make loans based on ability for the loan to be paid back and capital constraints. It has nothing to do with savings or reserves.”
banks respond to incentives in the price system. an exogenous shock to savings demand will in normal times change relative prices, which banks will respond to.
“In an economy with falling invomes and rising defaults, banks automatically tighten credit. Surely you’ve noticed how pro-cyclical bank lending is. You need to be a macro economist to miss that!”
why not just call me an idiot instead 🙂
thruth
Sep 19 2009 at 9:42am
winterspeak writes:”FLOCCINA: The Fed’s activity changes the constitution of financial assets, but cannot increase the equity entry on the liability side of the balance sheet.”
That’s not strictly true. By changing the relative prices of assets and liabilities the Fed can affect equity values. This is particularly relevant in the banking sector.
btw by calling myself names in my reply to your last post, I managed to get my comment into the moderation list. Hopefully it gets approved.
[Actually, it was the smiley face that put the comment into the spam list. It is a very common indicator of spam. (Evidently, we can be relatively confident that economists rarely engage in casual humor. In the last two months, I think there were only three legitimate comments that had smiley faces. In that same two months, over a hundred spam comments merried up their attempts by including smiley faces. More smiley face uses in legitimate comments would lead to my changing the weighting.) Though, while scanning through the comment before approving it, I did pause a moment over your suggesting that someone else call you an idiot. 🙂 –Econlib Ed.]
winterspeak
Sep 19 2009 at 11:05am
Daniel Kuehn: Arnold is certainly correct, in that sectoral shifts in employment demand are increasing frictional unemployment. If the natural rate of unemployment was 5%, this may make it 7.5% or so, a 50% increase. But it would not get us to the 10% we have now. That’s driven by a collapse in aggregate demand because the Govt is not funding private savings desire through deficit spending. Libertarians usually support the watchman state, but they don’t seem to understand that funding private savings is one of the watchman’s duties.
THRUTH: Operationally, how does this actually happen? The Fed buys and sells securities to get the interbank interest rate close to its target. The FFR is set by banks lending to each other, with the Fed intervening to get them to the “right” price.
The Fed should simply lend direct to banks, uncollateralized, since Govt money is the ultimate backstop anyway. As the Feds have taken on more and more collateral of duvious value to back their bank lending, they have effectively began to lend uncollateralized, as they should have been doing all along. The roundabout way the Fed sets rates is terrible and brittle.
And sure, the Fed can give bank stops a boost by putting Govt money behind them (although TARP was a Treasury action, and thus counts as deficit spending), but again, this does not help the private sector as a whole increase its savings. It just supports the leverage that sits on top of the (iinsufficient) savings already out there.
winterspeak
Sep 20 2009 at 1:04am
thruth @9.11: You are not using the identities correctly.
Y = C + I + G
If private spending on consumption and investment goes down (C+I) then G must increase for Y to remain constant. Include taxation and you’ll see that G-T must increase to fund the increase in net private sector savings.
Also, as the causality runs loans->deposits (and not the other way around, as commonly believed) the causality also runs investment->savings, not the other way around.
Real investment is recorded as savings after it happens. Savings do not “fund” investment, any more then deposits “fund” loans. This is a subtle point that I’m not going to get into. I’ve found that if people don’t understand why net private savings must equal the Fed deficit (to the penny), or how the private sector can trade the value in the equity line in their balance sheet but cannot (net) increase it, they aren’t ready for this.
Banks make loans that they think will be paid back. They do not dole out gifts of money, nor do they force loans on people who do not want to get into debt. This simple fact makes nonsense of the “money multiplier”.
They get the money to make loans by expanding both sides of their balance sheets. It has nothing to do with deposits.
Doc Merlin
Sep 20 2009 at 8:15am
@ Ryan: “This recalculation is fundamentally a good thing, and one that must be undertaken if the economy is to establish a more sound foundation for growth. Unfortunately current government policy is aimed at forestalling the necessary readjustment or attempting to eliminate it altogether.”
Absolutely! You win the thread.
thruth
Sep 20 2009 at 8:25am
winterspeak wrote: “I’ve found that if people don’t understand why net private savings must equal the Fed deficit (to the penny), or how the private sector can trade the value in the equity line in their balance sheet but cannot (net) increase it, they aren’t ready for this.”
Well I can certainly understand the static tautology:
(S – I) + (T – G) = 0
I can also understand that at a point in time the stock of wealth is fixed (I presume this is what you mean by equity, at least in aggregate). Both of these are features of any Macro model.
Obviously if S – I falls, T – G has to rise to keep income constant, so assuming net savings = S -I your statement that “households cannot increase net savings without an increase in the govt deficit” is right (though I’ll note (i) your very first post didn’t say net savings, (ii) it was never clear S – I was what you meant by net savings AND (iii) most certainly aggregate wealth is increased by S, not by S – I)
Most economists don’t view Govt as actively managing the deficit to maintain the tautology. Rather the price system ensures S – I offsets changes in T – G. If that wasn’t mostly true wouldn’t deflations be a much more regularly occurring phenomena?
So again, the onus is on any deflation story teller to explain when and why the price system breaks down to prevent necessary adjustments in S and I to maintain the tautology. I certainly don’t buy your story about banking, which would seem to imply that but for actively managed deficit spending we would always be swinging from bubbles to busts.
“They get the money to make loans by expanding both sides of their balance sheets. It has nothing to do with deposits.”
Deposits are part of the balance sheet, right? Constraints and relative prices determine the mix of bank funding (deposits, debt, equity).
“Also, as the causality runs loans->deposits (and not the other way around, as commonly believed) the causality also runs investment->savings, not the other way around.”
I don’t think there’s strict causality in either direction for either pair of quantities. I think people are (mostly, albeit imperfectly) responding to incentives. If a bank wants to make more loans it will have to find funding.
“Banks make loans that they think will be paid back.”
I would have thought banks make loans that are profitable (otherwise how do you explain the credit card?). Changing relative prices influence the profitability of lending and the incentives to raise or reduce capital (or other forms of funding).
winterspeak
Sep 20 2009 at 12:36pm
THRUTH: “Most economists don’t view Govt as actively managing the deficit to maintain the tautology. Rather the price system ensures S – I offsets changes in T – G. If that wasn’t mostly true wouldn’t deflations be a much more regularly occurring phenomena?”
This is because the Govt does not actively manage the deficit — although they should. Instead, they actively manage the FFR rate which is largely a waste of time IMHO.
Automatic stabalizers do passively manage the deficit though, and are largely what have kept us out of a Depression to date. This is something we did not have in the 1930s, but people overlook its importance.
“Deposits are part of the balance sheet, right?” Yes, and loans are the other. The banks makes the loan (expanding the left side) which creates the deposit (expanding the right side). Individuals cannot do this because we need to draw down one asset to create another. Banks create the asset and the liability simultaneously, and it’s triggered by the loan creation.
“”Banks make loans that they think will be paid back.”
I would have thought banks make loans that are profitable (otherwise how do you explain the credit card?).” If people did not pay off their credit card balances (and interest etc.) there would be no credit cards! You can’t get profit out of loans that default! So yes, the loan needs to 1) be paid back, and 2) be paid back with a little extra for the bank to make it. But return OF principle must happen before you start worrying about return ON principle.
You had a question about prices — namely, why can’t prices just adjust (decline) instead of all this other stuff?
The answer is because debt is nominally denominated. If the private sector, as a whole, wants to net save (or net reduce its debt), then falling prices confounds that the same way falling income does. Falling prices increase the real cost of outstanding nominal debt, making it impossible to reduce.
Fisher’s Debt Deflation is the most convincing account of this for me, and I would recommend you check it out. It makes more sense than the “wages are sticky” story (although there is some truth to that) and Fisher was an economist who was caught totally wrong-footed by the Depression, and changed his mind dramatically as a result. Pre-and-Post depression Fisher are worth comparing. He’s the rare economist who says “I was totally wrong, and this is why”.
andy
Sep 20 2009 at 7:06pm
Just googled on the baby-sitting coop – and found this article: http://emsnews.wordpress.com/2009/09/05/i-explain-to-krugman-the-real-story-of-baby-sitting-co-ops/
The liquidity preference doesn’t seem to have been THE problem…
winterspeak
Sep 21 2009 at 1:45am
ANDY: Nice story. I don’t think that the US Govt will have trouble with people wanting it’s chits so long as having them keeps them out of prison every April 15th ; )
jcb
Sep 24 2009 at 3:27pm
I don’t see why, as a skeptic about modern macroeconomics, you hold on to the notion of equilibrium, at all. Recalculation from one equilibrium to another presupposes what is supposed to be proved — that there is some immanent convergence of all relevant economic variables. There are no mystical steady states in the human sciences toward which all social ends converge. Human aren’t at equilibrium with their environments, they’re constantly adapting to them — unless you believe in the theology of intelligent design. Isn’t “equilibrium” the economic equivalent? If you believe in biological evolution and social evolution, why not accept the evolution of economies, without the teleology? Keynes was right: general equilibrium is a special (read: “rare”, “very rare”, “never in our lifetime”) case.
jcb
Sep 24 2009 at 3:28pm
I don’t see why, as a skeptic about modern macroeconomics, you hold on to the notion of equilibrium, at all. Recalculation from one equilibrium to another presupposes what is supposed to be proved — that there is some immanent convergence of all relevant economic variables. There are no mystical steady states in the human sciences toward which all social ends converge. Human aren’t at equilibrium with their environments, they’re constantly adapting to them — unless you believe in the theology of intelligent design. Isn’t “equilibrium” the economic equivalent? If you believe in biological evolution and social evolution, why not accept the evolution of economies, without the teleology? Keynes was right: general equilibrium is a special (read: “rare”, “very rare”, “never in our lifetime”) case.
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