Chicago economics delirium VSOP
from Lars Syll
Macroeconomics was born as a distinct field in the 1940s (sic!), as a part of the intellectual response to the Great Depression. The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.
Robert Lucas (2003)
In the past, I think you have been quoted as saying that you don’t even believe in the possibility of bubbles.
Eugene Fama: I never said that. I want people to use the term in a consistent way. For example, I didn’t renew my subscription to The Economist because they use the world bubble three times on every page. Any time prices went up and down—I guess that is what they call a bubble. People have become entirely sloppy. People have jumped on the bandwagon of blaming financial markets. I can tell a story very easily in which the financial markets were a casualty of the recession, not a cause of it.
That’s your view, correct?
Fama: Yeah.
The purported strength of Chicago — New Classical — macroeconomics is that it has firm anchorage in preference-based microeconomics, and especially that the decisions are taken by inter-temporal utility maximizing ‘forward-loooking’ individuals.
To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations — without ever presenting neither ontological nor epistemological justifications for this claim — has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations.
That anyone should take that kind of stuff seriously is totally and unbelievably ridiculous. Or as Robert Solow has it:
Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon. Now, Bob Lucas and Tom Sargent like nothing better than to get drawn into technical discussions, because then you have tacitly gone along with their fundamental assumptions; your attention is attracted away from the basic weakness of the whole story. Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous – that is, by laughing at it – so as not to fall into the trap of taking it seriously and passing on to matters of technique.
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—— Ugarteche, Puyana and Madi ——
Gerson Lima / Maria Alejandra Madi
Edward Fullbrook and Jamie Morgan
————— Michael Hudson ————–
Maria Alejandra Madi / Jack Reardon
————- Edward Fullbrook ————-
—————— Steve Keen —————–
————— Richard Smith —————
————– Gustavo Marques————
– Victor Beker and Beniamino Moro –
————– Lars Pålsson Syll ————-
—————– Stuart Birks —————-
Edward Fullbrook and Jamie Morgan
———— Armando Ochangco ———-
Shimshon Bichler / Jonathan Nitzan
————— Mauro Gallegati ————–
————— Herman Daly —————-
————— Asad Zaman —————
—————– C. T. Kurien —————
————— Robert Locke —————-
“That anyone should take that kind of stuff seriously is totally and unbelievably ridiculous. Or as Robert Solow has it:”
I’ve never come across that Solow quote before and I must say it’s a good one. I commend both him and you for emphasizing this vitally important this point.
I’ve wondered if it might not be more effective to condemn the “representative agent” rationalization as an exercise in wishful thinking based on a rather serious logical fallacy, the Fallacy of Composition.
The error arises from assuming that economic behavior which would benefit a single individual, if that individual was acting alone, would be behavior that would benefit everybody, if everybody were to behave in the same way. Time after time after time in economics we see that this is not true at all.
Give a single individual a big gift of money (e.g., in the form of a tax cut) and that individual will experience a real boost in purchasing power, compared to everyone else. But if everyone is given the same money gift, then none of them will experience a real gain in purchasing power because none of them will have improved their “rankings”, relative to their peers, within the hierarchy of all disposable incomes.
This is just one example of the error that is often made when economists “forget” that in market economies, behaviors that may benefit a single individual, or only a few, will often not benefit them, or anyone else, if everyone was to act the same way.
If economic theorists cannot be persuaded to recognize the central importance of this key feature of market economies and account for its impact on their models, then they are indeed wasting their time on a lot of meaningless blather…
You are making an error here, that of assuming the neutrality of money or the like. A universal money gift can cause real, major changes; rankings don’t mean everything. A simple example is if the gift enables a large part of the population to get out of debt. It could change the economic environment from depression & unemployment to “normal” growth or to serious inflation.
A universal money gift can cause real, major changes; rankings don’t mean everything.
Actually, rankings mean everything when it comes to purchasing power in the marketplace. All product brought to market by the supply side is auctioned off to the highest bidders, period.
One’s ranking within the hierarchy (of all disposable money accumulations) is what determines which would-be purchasers are ultimately priced out of a market and which ones can afford to participate in them.
The only time a universal money gift can cause a significant change in the standard-of-living of economic participants is when it causes a favorable allocation of resources.
If/when there are unemployed human resources available (unemployment), a gift to poorer folks can stimulate aggregate demand, providing suppliers with the money needed to expand production, putting those unemployed resources to work.
But if/when an economy’s human resources are fully employed, money gifts will provide no real improvement in the material well-being of those receiving the gift; it will all get burnt up in an inflation event.
One more caveat: a desirable resource reallocation can only be experienced by the lower classes, which would benefit from an increase in the production and consumption of real wealth.
If, on the other hand, rich people are the recipients of the money gift, pretty much all of it will get burnt up in an economically useless inflation event.
This, because—except in times of war—there is normally never a time with an economy’s resources are not optimally devoted to satisfying the whims of the richest of the rich. You just can’t improve on “all out.”
Again, you are seriously oversimplifying & making quasi-neoclassical errors. Ranking is not everything, inflation is not uniform, the immediate effect of the gift is ignored, (e.g. keeping people from being evicted) etc. “The only time” works out to be “almost all the time” in today’s societies.
…the immediate effect is ignored…
Here’s how I acknowledge the immediate effect while maintaining my fundamental argument:
Now with this imaginative scenario, I do acknowledge that in the short term some individuals would be able to experience a real economic gain IF they were to immediately go out and buy some luxury item before the hyperinflation had jacked up prices high enough to price almost everyone out of the market.
On the other hand, those who would choose to save almost all of their $10 million gift would be the biggest losers. But ultimately, the same amount of product (assuming full employment in this scenario) would be available for sale.
The Real Economy, my friend, is the only thing that matters when it comes to actual standards-of-living. Effects on real standards-of-living are the only consideration that working class sympathizing policy makers should ever really care about.
I want to see a full-employment economy driven primarily by lower-class expressed money demand because that will provide lower class folks with an optimized standard of living, so long as all available human resources are being employed.
I happen to think the best way to give the lower classes the money they need to accomplish this goal is through ramped up government spending on real economic investments (which would generate real improvements in living standards).
I want the ideal economy that any poor person could ever (realistically) hope for.
While I am in general agreement with what you are saying, in conflating two totally different issues into one, you make a completely unjustifiable assertion. In your paragraph beginning ‘To some of us, however, this has come at too high a price’, you conflate an incorrect assertion on the micro-foundations of macroeconomics into the totally correct assertion: that anyone should take ‘an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations’ is ‘totally and unbelievably ridiculous’. Any claim that the latter is true is clearly preposterous. However, arguing in purely philosophical terms about whether the micro-foundations of macroeconomics is true is a pointless exercise. There is already a proven demonstration that macroeconomics has valid micro-foundations. It is found when the passage of time is introduced, in a physically correct manner, into production theory. See ‘Transient development’ (Salter, RWER-81, pp 135–167).