Home > Uncategorized > Solow kicking Lucas and Sargent in the pants

Solow kicking Lucas and Sargent in the pants

from Lars Syll

robert_solow4Professors Lucas and Sargent … have a proposal for constructive research that I find hard to talk about sympathetically. They call it equilibrium business cycle theory, and they say very firmly that it is based on two terribly important postulates — optimizing behavior and perpetual market clearing. When you read closely, they seem to regard the postulate of optimizing behavior as self-evident and the postulate of market-clearing behavior as essentially meaningless. I think they are too optimistic, since the one that they think is self-evident I regard as meaningless and the one that they think is meaningless, I regard as false. The assumption that everyone optimizes implies only weak and uninteresting consistency conditions on their behavior … 

It is plain as the nose on my face that the labor market and many markets for produced goods do not clear in any meaningful sense. Professors Lucas and Sargent say after all there is no evidence that labor markets do not clear, just the unemployment survey. That seems to me to be evidence. Suppose an unemployed worker says to you “Yes, I would be glad to take a job like the one I have already proved I can do because I had it six months ago or three or four months ago. And I will be glad to work at exactly the same wage that is being paid to those exactly like myself who used to be working at that job and happen to be lucky enough still to be working at it.” Then I’m inclined to label that a case of excess supply of labor and I’m not inclined to make up an elaborate story of search or misinformation or anything of the sort … Why doesn’t the unemployed worker who told me “Yes, I would like to work, at the going wage, at the old job that my brother-in-law or my brother-in-law’s brother-in-law is still holding”, why doesn’t that person offer to work at that job for less? Indeed why doesn’t the employer try to encourage wage reduction? That doesn’t happen either … Those are questions that I think an adult person might spend a lifetime studying. They are important and serious questions, but the notion that the excess supply is not there strikes me as utterly implausible.

Robert Solow

No unnecessary beating around the bush here.

The always eminently quotable Solow says it all.

The purported strength of New Classical macroeconomics is that it has firm anchorage in preference-based microeconomics, and especially the decisions taken by inter-temporal utility-maximizing “forward-looking” 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. It is as if — after having swallowed the sour grapes of the Sonnenschein-Mantel-Debreu-theorem — these economists want to resurrect the omniscient Walrasian auctioneer in the form of all-knowing representative actors equipped with rational expectations and assumed to somehow know the true structure of our model of the world.

Solow once again shows us how totally and unbelievably ridiculous Chicago economics is.

On August 23 this great economist will be 95. Congratulations Robert!

  1. John deChadenedes
    August 4, 2019 at 12:25 am

    I have a suggestion. (Please see my post about defending mainstream economics at all costs.) Instead of wasting our time criticizing a “theory” that only works if we assume people all have superhuman knowledge, infallible forecasting ability, and perfectly rational expectations, why don’t all work on the conceptually much simpler problem of breeding humans who actually do have unimaginable knowledge banks, superhuman ability to forecast the future, and exquisitely logical expectations drawn from perfect understanding of all available options and unwavering analytical frameworks built on clearly definable metrics of utility, or whatever they call it now. All of the mainstream “theory” would then be true and we could go home and start thinking about the next big problem. Or…well, no. I’ll get into that later, perhaps.

  2. August 4, 2019 at 1:54 am

    Robert Solow was a favorite of mine as a young student. Thank you for reminding me why. A dash of Nicholas Roentgen and Van Gough adds historical flavors to savor like an opening door..

  3. Yok
    August 4, 2019 at 4:45 pm

    Chicago. A place where logical thought is placed on a foundation of nonsense.

  4. Ken Zimmerman
    August 7, 2019 at 12:54 pm

    I have great difficulty taking either this blog or economics seriously in the face of such drivel. Next time no need to make the title politically correct.

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