Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Saturday, September 05, 2009

A Must-Read Article!

Paul Krugman, the nobel-prize winning economist and NY Times columnist who sometimes goes in for more polemic than he should, has just written an excellent and quite long article about the economics profession, its past and future. It is rare that I just say "go read this," but that's what I'm urging. Among other things, he seems to praise Larry Summers, which is a big thing for him to do since they have been otherwise perceived as rivals.

Here's his conclusion after considerable detail: "So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics." Please, don't comment on this post without reading the article.
My take on this piece that he's basically correct that the efficient market hypothesis, in both strong and weak forms, has simply failed too often to continue to be the basis of macroenomic social science.

However useful rational actor assumptions are, and they are very useful, particularly for micro theory, macroeconomics has to deal with the fact that there is enough irrational behavior to distort the macroeconomic world. The engine of this needs to be explored, not assumed away. One thing to focus on is the source of capital accumulation - profit. Profits should be very modest in a world of perfect competition. One might suggest that profits, which lead to the accumulation of capital that drives capitalism, depend in no small measure on the inefficiencies in the market. Perfect competition pushes profits toward a minimum level; imperfect competition allows extraction of much higher rents for some. The ability to produce a product and sell it consistently at 50% profit to you is a source of great capital accumulation, but depends on imperfect market forces. Arbitrageurs should eliminate large profits, the ability to buy something at X price and sell it immediately at X+Y price for Y profit. When that doesn't happen, large profits can be reaped over sustained periods. Thus, relatively small amount of irrational behavior may take on oustized importance in the economy for the simple reason that it is a main source of capital accumulation.


Raised By Republicans said...

The Economist ran a similar article last month or so.

Raised By Republicans said...

You know, I've been thinking about his post for a while. And another point in favor of J.M. Keynes keeps coming to mind. This latest financial crisis and recession has been horrible around the world. But we seem to have avoided another world wide Great Depression. One of the reasons is a cooperative effort by many of the governments of the world's biggest economies to coordinate their stimulus strategies. Furthermore, they steadfastly avoided responding to increasing unemployment at home by cutting off trade.

These two reactions to global financial crises, coordinated governmental stimulus actions and continued commitment to free trade, were at the center of Keynes' original vision for the Bretton Woods economic institutions like the World Bank and IMF. To the extent that 60 years of constructive cooperation on economic policy between the largest economies was a result of the creation of the IMF, World Bank and WTO, we have Keynes himself as well as his long out of favor economic followers to thank for it.

The Law Talking Guy said...

And we avoided GOP Majority Leader Boehner's Hoover-style demand for the government to "tighten its belt" during these economic times.

The Law Talking Guy said...

One of the questions Keynes and his followers posed was whether it was possible for an economy to limp along indefinitely with high unemployment and anemic growth, what has been called a "general" deficiency in demand. I think one of the insights of these economists was that this appears to be possible. Avoiding that scenario may require consistent intervention.

What do we do if the natural equilibrium of the market is for a significant segment of the public (10% or so) to be permanently underemployed or unemployed. What do we do if the market simply won't value some people's labor above their subsistence needs?

Raised By Republicans said...

That's interesting about the persistent unemployment problem. But it is also a feature of established Keynesian welfare states. Germany's oft criticized (by Germans) "2/3 society" in which 2/3 of the people have secure, high paying jobs with great benefits and a generous welfare state that pays for health care, child care and education. However, a third of the people seem to be permanently dependent on the state who either spend much of their lives on the dole or who are chronically under employed.

The demonstrations of French youth are a response to a similar problem in France where the unemployment rate among young workers is astoundingly high.

Keynesian theories and institutions seem to have played a large and beneficial role so far in this recession. But I think they still have some problems and are often plagued by some similar problems to the wannabe Chicago School extremists.

Anonymous said...

Если врач знает название вашей болезни, это еще не значит, что он знает что это такое. Никогда не приписывай человеческой зловредности того, что можно объяснить обыкновенной глупостью. Человек может долго жить на деньги которые он ждет. Реальность это иллюзия вызываемая отсутствием алкоголя. Женщины едят за разговорами, мужчины едят заедой.

The Law Talking Guy said...

"If a doctor knows the name of your illness, that doesn't mean that he knows what it actually is."

And so forth.

But this is just a weird robopost.